Stocks Retreat On Disappointing Data, QE Concerns

Stocks finished Friday’s session in the red, although the Nasdaq 100 Index remained in positive territory throughout the afternoon. The June Chicago Purchasing Managers Index (a/k/a the ISM-Chicago Business Survey, the MNI Chicago Report and the Chicago Business Barometer) brought the day’s disappointment after declining more than expected.

The day’s only other economic report, the final edition of the Thompson Reuters /University of Michigan Consumer Sentiment Index for June decreased to 84.1 from May’s 84.5. Nevertheless, the index increased from the preliminary June reading of 82.7 and it exceeded economists’ expectations for a final reading of 83.0.

Fears about a premature termination of quantitative easing were rekindled on Friday as the result of widespread, out-of-context quotation from a speech given by FOMC member Jeremy Stein before the Council on Foreign Relations at 8:00, which was used to imply that the Fed will begin cutting its bond-buying in September. Here is the full quote:

Thus both in an effort to make reliable judgments about the state of the economy, as well as to reduce the possibility of an undesirable feedback loop, the best approach is for the Committee to be clear that in making a decision in, say, September, it will give primary weight to the large stock of news that has accumulated since the inception of the program and will not be unduly influenced by whatever data releases arrive in the few weeks before the meeting–as salient as these releases may appear to be to market participants. I should emphasize that this would not mean abandoning the premise that the program as a whole should be both data-dependent and forward looking. Even if a data release from early September does not exert a strong influence on the decision to make an adjustment at the September meeting, that release will remain relevant for future decisions. If the news is bad, and it is confirmed by further bad news in October and November, this would suggest that the 7 percent unemployment goal is likely to be further away, and the remainder of the program would be extended accordingly.

Despite the fact that the final sentence of the passage refutes the claim that Jeremy Stein announced that the “taper” would begin in September, most news outlets persisted in promoting the erroneous story.

The Dow Jones Industrial Average (DIA) lost 114 points to finish Friday’s trading session at 14,909 for a 0.76 percent decline. The S&P 500 (SPY) fell 0.43 percent to close at 1,606.

The Nasdaq 100 (QQQ) advanced 0.09 percent to finish at 2,909. The Russell 2000 (IWM) declined 0.26 percent to end the day at 977.

In other major markets, oil (USO) declined 0.50 percent to close at $34.16.

On London’s ICE Futures Europe Exchange, July futures for Brent crude oil declined by 78 cents (0.76 percent) to $102.04/bbl. (BNO).

August Gold Futures advanced by $19.50 (1.61 percent) to $1,231.10 per ounce (GLD).

Transports stalled out on Friday, with the Dow Jones Transportation Average (IYT) declining 0.49 percent.

In Japan, stocks rallied for the second consecutive day following an upbeat Markit/JMMA Japan Manufacturing PMI report for June. Japan’s Manufacturing PMI rose from May’s 51.5 to 52.3 in June – its highest level in 28 months. Continuing yen weakness helped fuel Friday’s rally. A weaker yen causes Japanese exports to be more competitively priced in foreign markets. During Friday’s trading session in Tokyo, the yen weakened to 98.99 per dollar (FXY). The Nikkei 225 Stock Average skyrocketed 3.51 percent to 13,677 (EWJ).

In China, momentum from the midday faded toward the end of the session, when the Shanghai Composite Index dipped back into the red. The index quickly rebounded during the last 15 minutes of the session, when PetroChina and the nation’s largest lender, ICBC led a last-minute rally, which pushed the index to a 1.50 percent advance at the closing bell. The late-day rally was so reminiscent of the American trading action during the early days of quantitative easing in 2009 that many commentators began to speculate about an “invisible hand” from some agency of the government, which ramped-up share prices for ICBC and PetroChina before the closing bell.

Friday was another one of those days when stock market commentators attempted to explain the day’s European stock market action as a response to an American economic report. On Friday, the June Chicago Purchasing Managers Index (a/k/a the ISM-Chicago Business Survey, the MNI Chicago Report and the Chicago Business Barometer) declined more than expected. Because this report was not released until 9:45 EDT, it could not possibly have caused the European stock market decline which began nearly two hours earlier (VGK).

The true reason for the European stock market slide was because the FTSEurofirst 300 Index declined 0.5 percent to 1,152 after encountering overhead resistance at its 200-day moving average of 1,156.

As of 9:01 EDT (before the release of the Chicago Business Barometer) the Euro STOXX 50 Index was down 0.77 percent to 2,599 – remaining just below its 200-day moving average of 2,633. Its Relative Strength Index is 41.21 (FEZ). The FTSE 100 Index declined 0.38 percent to 6,219 (EWU).

Technical indicators reveal that the S&P 500 remains below its 50-day moving average of 1,621 after closing at 1,606. The 50-day MA continues to provide significant overhead resistance. As a result, bears are anticipating a decline to the 200-day moving average of 1510. Its Relative Strength Index declined from 48.64 to 46.88. The MACD remains below the signal line and crossed far below the zero line to negative 9 before climbing to negative 7.7.

For the day, most sectors were in negative territory, except for the consumer discretionary and utilities sectors, which made advances of 36 percent and 24 percent, respectively. The healthcare sector took the hardest hit, falling 0.77 percent.

Consumer Discretionary (XLY): +0.36%

Technology: (XLK): -0.44%

Industrials (XLI): -0.58%

Materials: (XLB): -0.56%

Energy (XLE): -0.42%

Financials: (XLF): -0.64%

Utilities (XLU): +0.24%

Health Care: (XLV): -0.77%

Consumer Staples (XLP): -0.63%

Bottom line: Stocks made a retreat on Friday after a disappointing Chicago Business Barometer for June as well as unfounded concern about an earlier-than-expected phase-out of the quantitative easing program.

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