Stocks Retreat As Fear Returns On Wednesday

Stocks made moderate declines on Wednesday in the absence of any news which would excite investors. The Bureau of Labor Statistics reported that the Producer Price Index remained unchanged in July after surging 0.8 percent in June. Economists had been expecting an increase of 0.3 percent. So-called “core” producer prices – which exclude volatile food and energy – rose by only 0.1 percent, falling short of expectations for a 0.2 percent increase. The report’s release was followed by a significant amount of commentary, intended to dispel any belief that the Fed would be motivated to delay the dreaded taper of its bond-buying program as a result of the weak report.

Without any comforting prognostications that the Federal Reserve would delay the taper, the Chicago Board Options Exchange Volatility Index (VIX), also known as the “fear index”, jumped 5.93 percent on Wednesday. The result further reinforced the notion that the VIX has assumed a newfound role as the “Taperometer”, since it has been measuring taper fears.

The Dow Jones Industrial Average (DIA) lost 113 points to finish Wednesday’s trading session at 15,337 for a 0.73 percent decline. The S&P 500 (SPY) fell 0.52 percent to close at 1,685.

The Nasdaq 100 (QQQ) declined 0.37 percent to finish at 3,129. The Russell 2000 (IWM) fell 0.40 percent to end the day at 1,047.

In other major markets, oil (USO) climbed 0.50 percent to close at $38.09.

On London’s ICE Futures Europe Exchange, October futures for Brent crude oil advanced by 46 cents (0.42 percent) to $108.94/bbl. (BNO).

December gold futures advanced by $14.60 (1.11 percent) to $1,335.10 per ounce (GLD). Transports rolled into a ditch during Wednesday’s session, with the Dow Jones Transportation Average (IYT) dropping 0.84 percent.

The Japanese stock market had another big day as the exchange rate for the yen continued to fall, giving exporters a big boost. Toyota shares surged 1.3 percent during Wednesday’s trading session. The yen weakened to 98.43 per dollar before the closing bell in Tokyo. A weaker yen causes Japanese exports to be more competitively priced in foreign markets (FXY). The Nikkei 225 Stock Average jumped 1.32 percent to 14,050 (EWJ).

In China, stocks retreated on Wednesday as a result of weak earnings reports from the materials sector. The Shanghai Composite Index declined 0.29 percent to close at 2,100 (FXI). The Hong Kong Stock Exchange was closed due to a typhoon (EWH).

European stocks provided a surprisingly muted response to the news that the Eurozone finally escaped recession during the second quarter, after six consecutive quarters of contraction. The response apparent in the major European stock indices was surprisingly ambivalent, especially when comparing this news to some of the relatively insignificant events which have caused European stocks to rally in the recent past (VGK).

Eurostat reported that second quarter GDP for the Eurozone expanded by 0.3 percent compared with the first quarter. The report brought the surprising news that France enjoyed a second quarter increase of 0.5 percent (EWQ). Not surprisingly, Germany was the leader with 0.7 percent expansion (EWG). Spain and Italy remained in recession. Spain’s GDP contracted by 0.1 percent (EWP) and Italy’s GDP fell 0.2 percent (EWI).

The Euro STOXX 50 Index finished Wednesday’s session with a 0.37 percent advance to 2,852 –rising further above its 50-day moving average of 2,697. Its Relative Strength Index is 72.74. Most investors consider an RSI above 70 as an “overbought” signal (FEZ).

Technical indicators revealed that the S&P 500 continued to remain above its 50-day moving average of 1,655 after finishing Wednesday’s session with a 0.52 percent drop to 1,685. At this point, bears are hoping to see the formation of a head-and-shoulders pattern on the S&P chart. Its Relative Strength Index fell from 57.71 to 52.24. The MACD is below the signal line and both are on a downward trajectory, suggesting a continued decline.

For Wednesday, all sectors were solidly in negative territory. The consumer discretionary sector took the hardest hit, sinking 1.10 percent.

Consumer Discretionary (XLY): -1.10%

Technology: (XLK): -0.09%

Industrials (XLI): -0.70%

Materials: (XLB): -0.22%

Energy (XLE): -0.62%

Financials: (XLF): -0.39%

Utilities (XLU): -0.65%

Health Care: (XLV): -0.79%

Consumer Staples (XLP): -0.70%

Bottom line: Because the July Producer Price Index was not weak enough to raise hopes that the Fed would delay the cutbacks to its bond-buying program, investors were back to worrying about the taper, as stock prices declined and the VIX jumped by nearly six percent.

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