Day Traders Diary

12/17/13

Equities spent the bulk of today's session in the red, but afternoon buying interest helped the major averages end just below their respective flat lines. The S&P 500 shed 0.3% as eight of ten sectors registered losses.
Meanwhile, the Dow (-0.1%) traded ahead of its peers all session long as some of its top components provided support. 3M (MMM 131.39, +3.73) and Boeing (BA 135.88, +1.16) posted respective gains of 2.9% and 0.9% after both increased their quarterly dividends. The price-weighted index also received notable support from its top member, Visa (V 213.25, +5.50), which advanced 2.7%.
In turn, Visa's relative strength helped the technology sector (+0.03%) spend the entire session in the green. Chipmakers also factored into the modest gain as the PHLX Semiconductor Index ended higher by 1.0%.
Even though the tech sector outperformed, the tech-heavy Nasdaq could not stay out of the red as biotechnology weighed. The iShares Nasdaq Biotechnology ETF (IBB 213.66, -2.24) lost 1.0%, widening its December decline to 4.7%.
The losses in biotechnology also pressured the health care (-0.4%) space, which ended among the laggards. The remaining countercyclical groups did not fare much better as consumer staples (-0.5%) and telecom services (-0.8%) underperformed while utilities (-0.2%) ended just ahead of the broader market.
Today's losses among equities translated into a 1.4% gain for the CBOE Volatility Index (VIX 16.25, +0.22), which posted its fifth consecutive increase ahead of tomorrow's FOMC policy directive.
Treasuries climbed throughout the session as the benchmark 10-yr fell four basis points to 2.85%.
Participation was on the light side with only 656 million shares changing hands on the floor of the New York Stock Exchange.
Today's economic data was limited to just a handful of reports. November consumer prices were unchanged while the Briefing.com consensus expected an uptick of 0.1%. Core prices increased 0.2%, above the 0.1% increase expected by the Briefing.com consensus.
Separately, the current account deficit for the third quarter totaled $94.8 billion, which was narrower than the $101.0 billion deficit that had been broadly anticipated.
Lastly, the December NAHB Housing Market Index rose to 58 from 54 while the Briefing.com consensus expected the reading to tick up to 55.
Tomorrow, the weekly MBA Mortgage Index will be reported at 7:00 ET while November Building Permits and Housing Starts for September, October, and November will be released at 8:30 ET. The day's data will be topped off with the much-anticipated 14:00 ET release of the FOMC policy directive.
Below we lay out some key reasons why the FOMC might decide, or not decide, to make a tapering announcement on Wednesday.
The case for tapering now:
The House has passed the budget agreement and signs point toward the Senate doing the same this week. That signals the likelihood of less fiscal disruption, and less fiscal restraint, out of Washington in 2014.
Labor market trends are certainly improving. Nonfarm payroll gains have been 200,000+ in three of the last four months and have averaged 191,000 per month over the prior 12 months versus 151,000 (includes revisions) when QE3 was launched in September 2012.
Markets have hung in reasonably well as the case for a taper has gotten stronger, giving the Fed some measure of confidence (and another window of tapering opportunity) that participants are ready for a taper predicated on improving economic activity
Moody's notes high-yield spreads have hit a cycle low
The S&P 500 hit a new record high
After the strong November employment report, the fed funds futures market did not alter its view that the first rate hike will wait until July 2015
The 10-yr yield is down two basis points since the strong November employment report
The next scheduled FOMC press conference isn't until March. If a tapering announcement is made, the presumption is that the Fed chairman will want to explain it at a press conference (and the Fed chair may not want to wait until March given the improving data that could create financial market imbalances in the interim).
In the face of a declining budget deficit and an improving economy, there is growing uneasiness within the Fed about its balance sheet expansion
The case against tapering now:

Inflation rates remain well below the Fed's target rate
Real final sales, up 1.9% in Q3, remain relatively weak; and Q4 GDP is apt to be under 2.0%
The framework for a budget agreement is in place, but nothing has been resolved yet on the debt ceiling
There are reports that year-end liquidity issues will factor into a decision to hold off for now
Once the tapering begins, the Fed runs a heightened risk of seeing its credibility get eroded if it has to increase its purchases again on account of weakening data. While recent data have been encouraging, the Fed will want to be more certain about the sustainability of the improvement.

Nasdaq +33.3% YTD
Russell 2000 +31.7% YTD
S&P 500 +24.9% YTD
DJIA +21.2% YTD

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