Stocks Sink During Taper Talk

The major stock indices remained just below Tuesday’s closing levels until the FOMC Statement was released at 2:00, at the conclusion of the FOMC’s two-day monetary policy meeting, At that point, stock prices bounced frantically as investors attempted to ascertain the fate of the Fed’s quantitative easing program, which has been fueling the stock market for over four years.

Finally, at 2:30, Chairman Bernanke began his press conference. He wasted no time getting to the subject of the Fed’s bond-buying program. When he was asked why the future of quantitative easing was not discussed in the FOMC Statement, the Chairman said that he was “deputized” to explain it at the press conference because the phase-out of the program involved too many “subtle contingencies” for the matter to be adequately explained in the prepared document.

Dr. Bernanke expects to pull the plug on Patient QE in mid-2014. On the other hand, he explained that those who believe that the program will end at that time have “drawn the wrong conclusion” because of the contingencies involved. The Fed plans to be flexible with its timetable, making appropriate adjustments, depending on the progress of the economic recovery. The Chairman explained that the Fed will begin to scale back its bond-buying program “later this year” although the federal funds rate will remain low until 2015.

Although the news came as no surprise to those who have been paying attention to this issue, the market was shocked that the father of quantitative easing could discuss euthanizing his helpless child. The Dow Jones Industrial Average was down 175 points in the blink of an eye.

At the closing bell, the Dow Jones Industrial Average (DIA) sank 206 points to finish Wednesday’s trading session at 15,112 for a 1.35 percent decline. The S&P 500 (SPY) fell 1.39 percent to close at 1,628.

The Nasdaq 100 (QQQ) dropped 1.22 percent to close at 2,959. The Russell 2000 (IWM) sank 1.35 percent to close at 986.

In other major markets, oil (USO) declined 0.49 percent to close at $34.79.

On London’s ICE Futures Europe Exchange, July futures for Brent crude oil declined by 32 cents (0.30 percent) to $105.70/bbl. (BNO).

August gold futures declined by $16.70 (1.22 percent) to $1,350.20 per ounce (GLD).

Transports were submerged on Wednesday, with the Dow Jones Transportation Average (IYT) sinking 1.22 percent.

Japanese stocks made fat gains on Wednesday after Prime Minister Shinzo Abe’s controversial “Abenomics” agenda of weakening the yen accomplished its objective and boosted the nation’s exports by 10 percent in May. Economists had been expecting a less-significant increase by slightly more than six percent. A weaker yen causes Japanese exports to be more competitively priced in foreign markets (FXY). The Nikkei 225 Stock Average skyrocketed 1.83 percent to 13,245 (EWJ).

European stocks made modest declines on Wednesday, as investors were spooked by the controversy surrounding today’s important decision by America’s Federal Open Market Committee. In the absence of any significant European economic reports on Wednesday, investors turned their attention to the action in the States and pondered the consequences which the dreaded taper could pose for the European stock market (VGK).

The Euro STOXX 50 Index finished Wednesday’s session with a 0.63 percent decline to 2,683 – remaining below its 50-day moving average of 2,723. Its Relative Strength Index is 42.90 (FEZ).

In China, stocks fell after the People’s Bank of China took a firm stance against further monetary easing, despite complaints about a liquidity crisis. The Shanghai Composite Index declined 0.62 percent to 2,143 on trading volume which was approximately 25 percent thinner than average (FXI). Hong Kong’s Hang Seng Index sank 1.13 percent to 20,986 (EWH).

Technical indicators reveal that the S&P 500 remained above its 50-day moving average of 1,618 after closing at 1,628. The index is bouncing along, just above its 50-day moving average. Its Relative Strength Index fell from 56.36 to 49.17. The MACD remains below the signal line and has taken a downward trajectory, poised to cross below the zero line. If that happens, it would suggest the likelihood of a continued decline.

For the day, all sectors were solidly in negative territory, as the utilities sector took the hardest fall, with a loss of 2.29 percent. The materials sector escaped with the least damage, falling 0.71 percent.

Consumer Discretionary (XLY): -1.08%

Technology: (XLK): -1.10%

Industrials (XLI): -1.39%

Materials: (XLB): -0.71%

Energy (XLE): -0.93%

Financials: (XLF): -1.33%

Utilities (XLU): -2.29%

Health Care: (XLV): -1.51%

Consumer Staples (XLP): -1.97%

Bottom line: The stock market was traumatized on Wednesday, as Ben Bernanke discussed a tentative timetable for ending the quantitative easing program, which has been propping-up stock prices for over four years.

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.