To the casual observer, the decline of 2 points on the S&P 500, 25 points on the DJIA, and a gain of 0.80 points on the NASDAQ Composite might seem to indicate that it had been a pretty dull day at the corner of Broad and Wall on Wednesday. However, once again, nothing could be farther from the truth.
While the S&P did manage to lose just 2.34 points, or 0.13 percent, by the time the closing bell rang, there were four substantial intraday swings that really told the story of the day as well as what this market is really all about.
Good News Is Bad
Wednesday began with some very good news on the jobs front. ADP reported that private sector job growth in the U.S. economy expanded nicely in November, creating 215,000 new jobs. This was well above the consensus expectations for 175K jobs as well as last month's 184K (which was revised substantially higher from the original reading of 130K). This report came out at 8:15 am eastern time and before one could open a Diet Coke, the algos were in gear.
Here was the tweet from StateoftheMarkets (@StateDave) in response to the "good" jobs report from ADP:
ADP Jobs report a positive surprise. But oops, that suggests the Fed could taper soon (i.e. good news is bad). Futures move lower.— StateOfTheMarkets (@StateDave) December 4, 2013
Boom. Just like that, the action made it clear that good economic news - especially good employment news - was going to be bad for the stock market. As was pointed out in the tweet, the thinking was suddenly very straightforward.
The Game is All About Taper Expectations
The bottom line is the stock market game is (still) all about the Fed and the expectations as to when Bernanke or Yellen might start to taper the QE program. Currently, the expectations are that the Fed won't start cutting back on their bond-buying program until sometime in 2014, with most analyst's money being bet on March as the first "taper."
So, any better-than expected economic data (especially employment data) that lends credence to the idea that the Fed taper earlier than March is met with selling. And as one might suspect, any news that comes in below expectations in turn supports the idea that the taper won't begin sooner than expected.
Why is good news met with selling, you ask? Because when the Fed starts to pull back on their QE program, there will be less money pumped into the financial system each month. And since it has become clear that a fair amount of the $85 billion that is being created via the Fed each month has been finding its way into the U.S. stock market, well, less QE effectively means less stock buying as well.
Exhibits A - D
In case you are not buying into the idea that it is the expectations about when the Fed will taper that is driving the stock market, please examine Exhibits A, B, C, and D - all from Wednesday's trading.
Exhibit A: Stock futures fell the moment the ADP data was released and the S&P fell nine points in the first three minutes of trading.
Exhibit B: At 10:00 am eastern, the ISM Non-Manufacturing report was released. This data series is designed to indicate the "state" of the services sector in the U.S. economy. Unlike the ADP report, this report came in below expectations.
And what did the algos do with this data? Well, since good economic news is bad, then, of course, bad economic news is good, right? Right. Bam, the S&P moved up fourteen points or +0.78 percent in about twenty minutes.
This tweet summed it up nicely:
Don't think the Taper is the focus right now? S&P moves from 1787 to 1799 in 16 minutes after weak ISM data. Algos clearly in charge.— StateOfTheMarkets (@StateDave) December 4, 2013
You probably don't need the rest of the nitty-gritty details. But suffice it to say that stocks proceeded to move down -1.2 percent and then back up about 1 percent over the rest of the session. And most of the movement appeared to be tied to, yep, you guessed it; Fed taper expectations.
So, while the two-point move on the S&P may not have looked like much at the close, there was plenty of "taper tantrum" action going on intraday. And, until a new shiny object attracts traders' attention, this will likely be how the game is to be played for a while.
Turning to this morning... It will be a busy morning with rate decisions from both the ECB and the Bank of England, Challenger Job Cuts, Weekly Jobless Claims, and the first revision to U.S. GDP. So far at least, there are no signs that traders intend on taking stocks down for a fourth consecutive day. However, the keys to this market include the expectations for the "taper" and the consolidation theme (stocks have run a long way and need a rest).
Positions in stocks mentioned: none
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