Stocks closed lower for second day with S&P 500 losing 0.57%, closing below 1,700 at 1,697.37 while Dow 30 closed at 15,518.74 after shedding 0.60%. No major news were on air yesterday though, with the exception of improving US Trade Balance. Other than that, all other news were from across the Atlantic ocean, with UK showing higher than expected Industrial and Manufacturing production. There are good news from Europe too. Italian GDP came in less negative than previously thought, while German Factory Orders were stupendous, blowing expectations out of the water with a 4.3% Y/Y gain vs an expected 0.3%. Therefore, it is not unreasonable to assume that risk appetite was actually bullish just before US Open. European stocks actually gaped higher on open, and were holding onto their gains rather nicely then.
However, the fact of the matter is that US stocks did close lower, while European indices did end up closing lower by the end of the Europe hours, losing all the early gains. What has happened?
Looking around, we can pinpoint the culprit to Chicago Fed’s Charles Evans comments yesterday. The FOMC voting member said that the US economy will be able to withstand a taper should it happens this year. This opinion is not new, and echoes the views of numerous analysts and other Fed members. The only issue is that this comment came from the meekest dove within the Fed’s nest, and having Evans switching to a less dovish (if not hawkish) tune is disturbing, and suggest that we could see one more voting member leaning in favor of a taper in 2013. Considering that even Evans is switching camp, the likelihood of all other doves moving over is higher, and increases the probability of a tapering scenario even if Bernanke does not want it to happen.
S&P 500 Hourly Char
Market got spooked understandably, allowing bears to finish their job that they failed to accomplish on Monday. Technicals show S&P 500 prices dipping below the the swing high of 1st August (31st July EDT), the post FOMC decision rally. Prices rebounded slightly, but was unable to climb back above the resistance level, suggesting that the rally from last week has been invalidated. Looking at the detailed play by play price action of yesterday, we can actually see that prices were already bearish to begin with. Futures prices climbed during early European hours, only to find resistance from Ichimoku’s Senkou Span A. An Evening Star pattern was formed following the European highs, but price stabilized around 1,702.5 quickly, and remained there until Evans started speaking a few hours later.
This is actually good news because this suggest that bears were lurking in wait for selling opportunities, and took the first one that was available, suggesting that current sell-off may still be able to have more legs to run further. Stochastic readings is in line with such a scenario, with some space left between current levels and the Oversold region, hinting that a move back towards 1,685 thereabouts consolidation range may be possible.
Dow 30 Hourly Chart
Dow 30 continue to remain more depressed than S&P 500, with price levels dipping below last week’s low briefly yesterday. Currently we are moving back towards yesterday’s swing low, with the next bearish target the lows from the week of July 22nd (2 weeks ago, around 15,400) which is viable based on the same reasons described above.
Long term economic health of US remains bullish. There must be good and convincing reasons why Evans is potentially switching camps. With that in mind, it is possible that any sell-off even in the event of a QE taper will be temporary, with sensible traders preferring to push equities in the belief that it is a sign that US economy is coming out of the woods, and without clutches this time round. Based on recent reaction to data, it seems that market is already starting to believe in the long-term non-QE dependent growth prospect of US once more, with positive reactions towards strong economic numbers and vice versa. All is certainly not doom and gloom, which means current bears should probably enjoy current bearish momentum as much as they can for now.