Taper-Phobia Spooks Stock Market

The stock market was off to a bullish start in the morning, as investors assumed that the testimony of Federal Reserve Chairman Ben Bernanke before the Joint Economic Committee would soothe their nerves about the fate of the quantitative easing program. Investors took comfort in the following statement:

“At its most recent meeting, the Committee made clear that it is prepared to increase or reduce the pace of its asset purchases to ensure that the stance of monetary policy remains appropriate as the outlook for the labor market or inflation changes.”

However, during the question and answer session, Bernanke remarked that the FOMC could begin to taper back its bond purchases if the economic data warranted it. The mere possibility that Operation Taper could begin during the “next few meetings” obviously gave investors the jitters as the major stock indices immediately began to slide down from their record intraday highs. Once the FOMC released the minutes of its April 30-May 1 meeting at 2:00, commentators began to focus on the fact that some FOMC members wanted to initiate Operation Taper as early as June, leading some to speculate that the effort could begin during the third or fourth quarter of this year. Stocks continued their slide into the red.

The Dow Jones Industrial Average (DIA) dropped 80 points to finish Wednesday’s trading session at 15,307 for a 0.52 percent decline. Nevertheless, the Dow managed to reach a new record intraday high of 15,542.40. The S&P 500 (SPY) finished Wednesday’s session with a 0.83 percent decline to close at 1,655. The S&P also reached a new record intraday high of 1,687.18.

The Nasdaq 100 (QQQ) fell 0.90 percent to 2,999. The Russell 2000 (IWM) sank 1.65 percent to 982 despite reaching a new record intraday high of 1,008.23.

In other major markets, oil (USO) sank 1.91 percent to close at $33.46.

On London’s ICE Futures Europe Exchange, July futures for Brent crude oil declined by $1.49 (1.43 percent) to $102.42/bbl. (BNO).

June gold futures declined by $14.30 (1.04 percent) to $1,363.30 per ounce (NGLD).

Transports backed into a sinkhole on Wednesday, with the Dow Jones Transportation Index (IYT) falling 1.50 percent.

European stocks resumed their advance on Wednesday as strength in base metals and mining companies led to a rally in the commodities sector (VGK). The Euro STOXX 50 Index finished Wednesday’s trading session with a 0.47 percent advance to 2,835 – remaining above its 50-day moving average of 2,695 (FEZ).

In Japan, stocks surged as the yen continued to weaken. After the close of the Japanese stock market the yen fell to 103.74 per dollar. A weaker yen results in more competitive prices for Japanese exports in foreign markets (FXY). The Nikkei 225 Stock Average jumped 1.60 percent to 15,627 (EWJ).

In China, stocks retreated after a five-day advance as investors became anxious about the HSBC Flash Manufacturing PMI report for May, which will be released on Thursday. The Shanghai Composite Index declined 0.11 percent to 2,302 (FXI). Hong Kong’s Hang Seng Index declined 0.45 percent to 23,261 (EWH).

Technical indicators reveal that the S&P 500 remains far above its 50-day moving average of 1,588 after closing at 1,655 – as bears continue to hope that we are watching the formation of a head-and-shoulders pattern, which would signal a decline. Its Relative Strength Index fell from 72.51 to 64.64 – dropping back below the threshold level of 70, which most investors consider an “overbought” signal. Although both the MACD and the signal line continue soaring above the zero line (suggesting the likelihood of a further advance) the MACD has assumed a downward trajectory toward the signal line. If the MACD crosses below the signal line, that would suggest a the likelihood of a decline.

For the day, all sectors were solidly negative, except for the healthcare sector, which remained unchanged. The hardest-hit groups were the utilities and materials sectors.

Consumer Discretionary (XLY): -0.95%

Technology: (XLK): -1.09%

Industrials (XLI): -0.88%

Materials: (XLB): -1.36%

Energy (XLE): -1.16%

Financials: (XLF): -1.05%

Utilities (XLU): -1.69%

Health Care: (XLV): (unchanged)

Consumer Staples (XLP): -0.17%

Bottom line: Fears about the Fed’s plans to taper back quantitative easing erased Wednesday’s record-high gains as a result of increased speculation that a reduction in Federal Reserve bond-buying could begin during the third or fourth quarter of this year.

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