Fed Remarks, Stocks Retreat

Ulli Market Commentary Contact

Tue pic

[Chart courtesy of MarketWatch.com]

Stocks resumed their recent decline as investors sold growth-oriented sectors on speculation the Federal Reserve may slow the pace of its economic stimulus. U.S. equities opened the session on an upbeat note as the Dow Jones Industrial Average appeared poised for its 21st consecutive Tuesday of gains.

However, that changed midway through the trading day when the major averages dipped into the red, where they remained until the close. The Dow fell 76 points (0.5%) to 15,178, the S&P 500 Index moved 9 points (0.6%) lower to 1,631, and the Nasdaq Composite declined 20 points (0.6%) to 3,445.

Today’s economic data was limited to the trade deficit, which widened $3.2 billion to $40.3 billion in April, below the consensus of $41.5 billion. In April, imports rebounded 2.4%, while exports rose 1.2%. Weekly retail sales rebounded 1.9% last week, the most in two months, and is up 4.3% on a y/y basis, the fastest pace in a year, according to the ICSC/Goldman Sachs Chain Store Sales Index. Elsewhere, the latest data from CoreLogic shows house price gains exceeding 12% from a year ago, the fastest pace since February 2006, which means the next bubble is alive and well.

Today’s declines followed a roughly 2 percent retreat in the last two weeks from a seven-month run of gains, which had been partly driven by continued economic support from the central bank.

Eight of the ten sectors ended in the red, but it was most noticeable among cyclical groups as energy, financials, and industrials lost between 0.6% and 0.9%. Discretionary stocks outperformed other growth-oriented sectors, but a large subsector, homebuilders, did not share in the relative strength. Several major builders saw losses of more than 3.0%.

Also of note, the technology sector saw some mixed performance as chipmakers advanced while major components lagged. On the upside, the telecom sector spent the entire day in positive territory as two major components, AT&T and Verizon, settled with gains.

Concerns have flared up regarding the possibility of the Fed reducing the pace of asset purchases sooner than expected. Remarks from Kansas City Fed President Esther George hit the wires as stocks were sliding. She expressed support for reducing the Fed’s bond-buying program. The market lately has been sensitive to any indication that quantitative easing will end. Has reaction been a bit overdone as Chairman Bernanke already noted that no move would happen unless things look substantially improved?

As in the past, any hint of further QE was enough to propel the markets higher with utter abandon, so the opposite is likely to happen as well, as fears of tapering, whether justified or not, will likely affect markets negatively.

The major trends remain in place, although upward momentum has weakened, as our Domestic Trend Tracking Index (TTI) slipped to +3.05%, while the International TTI eased to +6.72%.

I will post the latest update to the ETF Model Portfolio report tomorrow morning.

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