Quantitative Easing Nightmares Spook Investors

Stocks slid downhill on Wednesday as investors continued to have nightmares about life without quantitative easing. Because the market has been fueled by the Fed’s liquidity pump for more than four years, many fear that any cutback to the program will sink stocks. At this point it appears as though most investors will not be happy unless Thursday’s report on initial unemployment claims indicates a drastic increase, causing Dr. Bernanke to rethink his plans for killing Patient QE.

The Dow Jones Industrial Average (DIA) fell 126 points to finish Wednesday’s trading session at 14,995 for a 0.84 percent decline. Wednesday’s session concluded the first 3-day swoon for the Dow this year. The S&P 500 (SPY) also fell 0.84 percent to close at 1,612.

The Nasdaq 100 (QQQ) sank by 1.14 percent to close at 2,926. The Russell 2000 (IWM) dropped 0.93 percent to 972.

In other major markets, oil (USO) advanced 0.71 percent to close at $34.03.

On London’s ICE Futures Europe Exchange, July futures for Brent crude oil advanced by 61 cents (0.59 percent) to $103.58/bbl. (BNO).

August gold futures advanced by $11.20 (0.81 percent) to $1,388.20 per ounce (GLD).

Transports stalled out on Wednesday, with the Dow Jones Transportation Average (IYT) declining 0.61 percent.

After the Bank of Japan decided against introducing any new stimulus measures to stabilize the recent volatility of Japanese Government Bonds at the conclusion of its two-day policy meeting on Tuesday, the yen continued to strengthen. A stronger yen causes Japanese exports to be less competitively priced in foreign markets (FXY). Critics had hoped that the BOJ would extend longer fixed-rate loans to banks in attempt to tame JGB volatility.

The BOJ decision sent the yen soaring 2.8 percent to 96.03 per dollar during Wednesday’s trading session. Once it seemed apparent that the bad news had been priced-in to its fullest extent, the yen weakened slightly and stocks pared their losses. The Nikkei 225 Stock Average finished the session with a 0.21 percent decline to 13,289 (EWJ). Nevertheless, as of this writing, the yen once again strengthened to exactly 96.00 per dollar.

The major European stock indices were still trying to shake off the hangover from Tuesday’s Japanese excitement, when a report from Eurostat brought more bad news than good news. The report disclosed that industrial production increased by 0.4 percent in the Eurozone during April. For the greater, 27-nation European Union, industrial production increased by 0.3 percent. Unfortunately, the increases were less significant than the 0.9 percent rise during March in both zones. Worse yet, on a year-over-year basis, industrial production fell by 0.6 percent in the Eurozone and by 0.8 percent in the EU27 (VGK).

The Euro STOXX 50 Index finished Wednesday’s session with a 0.62 percent decline to 2,666 – remaining below its 50-day moving average of 2,715. Its Relative Strength Index is 38.47 (FEZ).

In China, both the Shanghai Stock Exchange and the Hong Kong Stock Exchange were closed for the Dragon Boat holiday (FXI, EWH).

Technical indicators reveal that the S&P 500 barely remained above its 50-day moving average of 1,610 after closing at 1,612 – as some bears might insist that a head-and-shoulders pattern has now formed on the chart, which would signal a decline. Others may point out that the right shoulder appears to have broken above the neckline, although if the S&P 500 should close below its 50-day moving average, that will not matter. A selloff would likely ensue. Its Relative Strength Index fell from 48.38 to 44.20. The MACD remains below the signal line and both are on descending trajectories, suggesting the likelihood of a further decline.

For the day, all sectors were solidly in negative territory, as the consumer discretionary and financial sectors took the hardest hits, with losses of 1.10 percent and 1.07 percent, respectively. The consumer staples sector escaped with the least damage, declining by 0.49 percent.

Consumer Discretionary (XLY): -1.10%

Technology: (XLK): -0.67%

Industrials (XLI): -0.69%

Materials: (XLB): -0.50%

Energy (XLE): -0.61%

Financials: (XLF): -1.07%

Utilities (XLU): -0.98%

Health Care: (XLV): -1.01%

Consumer Staples (XLP): -0.49%

Bottom line: Stocks continued to decline on Wednesday as widespread fear of life without quantitative easing swept over the market. As I mentioned yesterday, now may be the right time to act on my idea for marketing little Teddy bears, designed to resemble Ben Bernanke, which can serve as “transitional objects” for anxious investors.

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