Stocks Slip As Taper Talk Spooks Investors

Both the Dow Jones Industrial Average and the S&P 500 Index were in the red all day Monday, despite a better-than-expected July Non-Manufacturing Index from the Institute for Supply Management. Stocks failed to escape from the red after the 10:00 release of the July 2013 Non-Manufacturing ISM Report on Business. The report’s headline Non-Manufacturing Index (NMI) rose to 56 percent from June’s 52.2, beating economists’ expectations of a less-significant increase to 53 percent.

Investors were in a selling mood after the Relative Strength Index for the S&P 500 rose to 70.10 at Friday’s close. An RSI above 70 is seen as an “overbought” signal, which likely motivated many investors to take profits on Monday.

Dallas Federal Reserve President Richard Fisher’s Monday speech before the National Association of State Retirement Administrators, entitled “Horeshift!” kept investors feeling worried about the dreaded taper of the quantitative easing program. As we pointed out on Friday, the drop in the unemployment rate from 7.6 percent to 7.4 percent in the July non-farm payrolls report was a big step toward the 7 percent unemployment figure which Ben Bernanke has frequently mentioned as a threshold for beginning the taper. Richard Fisher drove that point home in his speech:

Having stated this quite clearly, and with the unemployment rate having come down to 7.4 percent, I would say that the Committee is now closer to execution mode, pondering the right time to begin reducing its purchases, assuming there is no intervening reversal in economic momentum in coming months.

The Dow Jones Industrial Average (DIA) lost 46 points to finish Monday’s trading session at 15,612 for a 0.30 percent decline. The S&P 500 (SPY) slipped 0.15 percent to close at 1,707.

The Nasdaq 100 (QQQ) dipped 0.01 percent to finish at 3,143. The Russell 2000 (IWM) was back to its usual routine of record-high closes, finishing Monday’s session with 0.30 percent advance to its latest record-high close at 1,063.

In other major markets, oil (USO) declined 0.29 percent to close at $37.83.

On London’s ICE Futures Europe Exchange, September futures for Brent crude oil declined by 39 cents (0.36 percent) to $107.71/bbl. (BNO).

August Gold Futures declined by $7.50 (0.57 percent) to $1,303.10 per ounce (GLD).

Transports took on water during Monday’s session, with the Dow Jones Transportation Average (IYT) sinking 0.78 percent.

In Japan, stocks took a big hit as the yen strengthened to 98.26 per dollar during Monday’s trading session in Tokyo. A stronger yen causes Japanese exports to be less competitively priced in foreign markets (FXY). The Markit Japan Services PMI for July fell to 50.2 from June’s 52.1 and the Composite Output Index dropped to 50.7 from June’s 52.3. The Nikkei 225 Stock Average sank 1.44 percent to 14,258 (EWJ).

In China, stocks surged after the official non-manufacturing PMI from the National Bureau of Statistics rose to 54.1 in July from June’s 53.9. Nevertheless, the HSBC July China Services Business Activity Index remained unchanged from June’s 51.3, while the HSBC Composite Output Index slipped further into the range of contraction to 49.5 from June’s 49.8. The HSBC Hong Kong PMI rose to a less-bad 49.7 in July from June’s 48.7. The Shanghai Composite Index jumped 1.04 percent to close at 2,050 (FXI). Hong Kong’s Hang Seng Index advanced 0.14 percent to finish the session at 22,222 (EWH).

European Stocks were slightly in the red on Monday, after the final Markit Eurozone Business Activity Index for July rose to a “less bad” 49.8 from June’s 48.3 while beating the flash estimate of 49.6. Nevertheless, a reading below 50 indicates contraction. On the other hand, the final Markit Eurozone Composite Output Index for July rose to the range of expansion, climbing to 50.5 from June’s 48.7, while beating the flash estimate of 50.4 (VGK).

The Euro STOXX 50 Index finished Monday’s session with a 0.07 percent dip to 2,809 – remaining above its 50-day moving average of 2,690. Its Relative Strength Index is 68.96 (FEZ).

Technical indicators reveal that the S&P 500 remained above its 50-day moving average of 1,649 after finishing Monday’s session with a 0.07 percent dip to 1,707 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 declined from 70.10 to 68.28. After the RSI rose above the “overbought” threshold of 70 at Friday’s close, many investors likely saw that as a “sell” signal, resulting in Monday’s slight decline. After dipping below the signal line on Wednesday, the MACD has edged back above it, although remaining on a level trajectory, suggesting that the S&P could remain relatively unchanged.

For Monday, only two sectors were in positive territory. The technology sector led the group, with a 0.22 percent gain and the consumer staples sector rose by 0.07 percent. The utilities sector trailed the group with a 0.66 percent decline.

Consumer Discretionary (XLY): -0.21%

Technology: (XLK): +0.22%

Industrials (XLI): -0.38%

Materials: (XLB): -0.27%

Energy (XLE): -0.24%

Financials: (XLF): -0.22%

Utilities (XLU): -0.66%

Health Care: (XLV): -0.14%

Consumer Staples (XLP): +0.07%

Bottom line: Dallas Federal Reserve President Richard Fisher’s warning that the taper is near, helped keep the Dow and S&P 500 in the red on Monday, despite the better-than-expected July Non-Manufacturing Index from the Institute for Supply Management.

Disclaimer: The content included herein is for educational and informational purposes only, and readers agree to Wall Street Sector Selector's Disclaimer, Terms of Use, and Privacy Policy before accessing or using this or any other publication by Wall Street Sector Selector or Ridgeline Media Group, LLC.