On Wednesday, Federal Reserve Chairman Ben Bernanke hinted that easing efforts could begin before the end of this year. The statement that followed indicated that one reason for the decision was that the rate of inflation was below the Fed’s target. Bernanke also said that if economic conditions continued to improve the end of all bond purchases could occur by the middle of 2014.
The Fed’s statement put both the stock market and bonds into a downward spin. The bond market was hit hardest as the yield on the 10-year note rose to 2.308%, the highest level in 15 months.
At Wednesday’s close, the Dow Jones Industrial Average was off 206 points at 15,112, the S&P 500 fell 23 points to 1,629, and the Nasdaq lost 39 points at 3,443. The NYSE traded 760 million shares and the Nasdaq crossed 430 million. Decliners outpaced advancers on the Big Board by 5-to-1, and on the Nasdaq, decliners were ahead by 2.6-to-1.
Even though defensive high-yield stocks took a beating Wednesday, the Dow Jones Utility Average managed to close above its intermediate bullish trendline. It did, however, close under its 200-day moving average at 480.36. MACD is in “buy” mode.
The S&P 500, like the other major indices, reversed down Wednesday following the Fed’s presentation. And also like the others, it sliced through its 20-day moving average but held above its 50-day moving average at 1,618. Its MACD is flat.
Conclusion: Good news — the economy is improving. Bad news — both stocks and bonds were pummeled. What gives?
Bernanke said that the economy is improving with lower-than-expected inflation. Thus, “mission accomplished,” and so the Fed plans to eventually wean the economy off of the supportive bond buying spree.
But, like a child who has his training wheels removed and must for the first time ride a two-wheeler on his own, he panics — and that’s what happened to the market Wednesday. Holders of high-yielding stocks and growth stocks are now faced with the challenge of stocks being supported by self-generated success and not money from their favorite uncle, Uncle Sam.
Despite the heavy selling, technically, not one of the major markets broke its intermediate trendline. Even the high-yielding utilities held their own — and may now be an excellent value following an 11% decline from the index’s April high. But all of the indices again came to rest within the 20-day and 50-day moving average trading zone. And the failure to make new highs is persuasive evidence that the April highs will not be challenged again until October.
Today’s Trading Landscape
To see a list of the companies reporting earnings today, click here.
For a list of this week’s economic reports due out, click here.