Strong Retail Sales Spark Taper Talk

The market is lower in early trading, but once again the selloff appears mild by historical standards.  Yesterday the market dipped also but closed down only slightly on the day.  Dip buyers continue to lurk, and as such those looking for a correction continue to be frustrated.

The big piece of economic data in the headlines this morning was the July retail sales report.  Retail sales rose 0.2% after rising an upwardly revised 0.6% in June.  Ex-autos, retail sales rose a strong 0.5% in July.  Given the weak employment report a couple of weeks ago, many economists were not expected strong retail sales figures.

The strong retail sales report sparked waves of selling in bond, sending prices lower and yields higher.  The yield on the 10-year Note spiked 10 basis points to 2.71% currently.  That has all the interest rate-sensitive sectors lower, including REITs, utilities, preferreds, and bond funds.  For reference, the recent high in the 10-year is 2.73%, touched on Aug. 2.

Bond traders believe the stronger economic data is enough to increase the likelihood of the Fed cutting back on its asset purchases as early as September.  A lot will probably be riding on the September jobs report.  But the Fed doesn't want to surprise the market, so if it appears that a September tapering is already being priced into markets that might make it easier for the Fed to go ahead and get the ball rolling on that front.

Asian markets were higher across the board.  An advisor to Japan's PM suggested delaying the implementation of the sales tax increase until late 2014.

Europe's markets are also mostly higher.  Eurozone industrial production increased 0.7% last month.  And Spain's Treasury chief said the country plans to reduce the pace of its debt sales by 30% starting in September.

The dollar is up today and most commodities are weaker.  Oil prices are down slightly to $105.60 and gold prices are lower near $1328.

The volatility index is up about 3% currently near the 13.0 level as the stock market continues to languish in the red.

Trading comment: Yesterday we mentioned the S&P 500 and its overhead 20-day average acting as resistance.  So far today is day 3 of the senior index trading below this short-term moving average.  Many traders are also watching this 1684-1687 level for support.  To us, the market still looks like it is in some need of further consolidation with sideways choppiness a likely outcome.  Some former leading groups like biotechs seem to be undergoing distribution while recent laggards like materials are starting to bounce.  We continue to put a little bit of cash to work on dips but feel that patience will likely yield a better buying opportunity.