The U.S. stock market ended a two-day bounce with widespread declines on Tuesday. Fortunately losses were mild. Overall it was a relatively quiet session without any major economic news. A few market pundits blamed today's weakness on tax-loss selling before the yearend. Others felt that stocks could be reacting to a small but growing camp of analysts who suspect that the Federal Reserve might announce a taper to their QE program at next week's FOMC meeting.

By the closing bell the S&P 500, Dow Industrials, and NASDAQ composite were all down about -0.3%. Yet the small cap Russell 2000 index underperformed with a -0.89% decline. Precious metals managed a bounce with the GLD gold ETF up +1.75% and the SLV silver ETF up +2.8% thanks to the U.S. dollar falling to a new six-week low.

Volcker Rule Vote

One of Wall Street's biggest stories today was the vote on the Volcker Rule. The rule is named after former Federal Reserve Chairman Paul Volcker. This piece of legislation was part of the Dodd-Frank Wall Street Reform and Consumer Protection Act, which passed into law back in 2010. The rule is supposed to limit activities for U.S. banks with limits on what sort of hedging they can do, limits on what sort of risky investments they can participate in, and the probably the most controversial part of the rule is an outright ban on any proprietary trading.

Five U.S. regulating bodies (The Federal Reserve, the FDIC, the SEC, the CFTC, and the OCC) all voted on the Volcker Rule today and it passed. The current version does have several exceptions and will slowly be phased into effect over the next two years. There has been plenty of debate over the Volcker Rule. The big banks believe the rule is too strict while the anti-bank crowd thinks the rule is too lenient. You can bet we'll be hearing about the Volcker Rule again.

A December Taper?

A major theme today was speculation that the Federal Reserve might announce some sort of taper to their $85 billion a month QE program at its next FOMC meeting on December 18th (next week). The idea here is that the recent string of better than expected jobs reports and the positive, albeit bumpy, trend in economic data is suggesting the U.S. recovery is finally self sustaining. There does seem to be a growing camp of analysts suggesting that the Fed could taper in December. This speculation could be sapping the stock market's strength.

I've heard a number of analysts suggest that a taper is already baked into the market. That is possible. Investors have been hearing about the potential for the Fed to taper for months and months. Odds are that stocks could still see a knee jerk reaction sell off when the Fed does announce, especially if they announce in December. Most people are expecting the Fed to announce a taper at their March 2014 FOMC meeting. That would allow Janet Yellen to assume her position as the next Fed chairman. Plus, waiting until March would avoid any potential turmoil the U.S. debt ceiling debate could cause in February.

The bond market certainly doesn't seem to be alarmed about any potential Fed taper in December or the bond market does not think there is a high chance it will happen. Today saw the U.S. bond market continue to bounce with the yield on the 10-year note falling to 2.797%. If bond investors really thought the Fed would taper next week then bonds should be falling (and yields rising). Of course everyone knows the Fed will taper their QE program eventually so maybe the bond market has also priced in the taper whether it's announced in December, January, or March.

U.S. Budget Deal

One of the best news stories out today was a budget deal in Washington. After the market's closing bell it was announced that House Budget Committee Chairman Paul Ryan and Senate Budget Committee Chairman Patty Murray had agreed on a two-year U.S. budget deal. This has been in negotiation for weeks and honestly many doubted a deal would get done before the Friday, December 13th deadline.

In the true spirit of compromise no one was happy. Republicans felt it didn't do enough to cut spending and address the U.S. debt. Democrats felt the deal didn't address taxes and corporate loopholes. What this deal does do is remove the annual sequestration cuts to both defense spending and entitlement programs. House leader Boehner and Senate leader Reid both felt that the new budget has a good shot at getting passed. Congress will vote on it before Friday and their Christmas recess. The Senate will vote on it next week. Lack of a U.S. budget deal was a potential black cloud for the stock market and tonight's headlines could be bullish for tomorrow's market. It is worth noting that tonight's budget deal does not settle the fight over the U.S. debt ceiling and its February 2014 deadline.

Stock Headlines

In corporate news General Motors (GM) was making headlines. Yesterday the company announced that the U.S. government had finally sold off the remainder of its equity stake in the company. During the 2007-2008 financial crisis the U.S. government provided a $50 billion bailout for GM, which gave the U.S. a 60% stake in the company. Five years later the U.S. sold the last of its stock for a $10 billion loss. Today's big headline for GM was news that CEO Dan Akerson is retiring next month and Mary Barra will replace him. Barra has been working for GM for years as an engineer. Today's announcement makes Mary the first female CEO of any of the big three U.S. automakers in history.

Another story you will likely hear about tomorrow is MasterCard Inc.'s (MA) stock split. After the closing bell tonight MA announced that its Board of Directors had approved a 10-for-1 stock split and an +83% increase in its dividend to $1.10 a share. The stock closed at $763.61 a share today and was trading up to $800 a share in after hours. The stock split will take effect on January 9th, 2014. Post-split the new dividend will equal 11 cents a share.

Major Indices:

The S&P 500 lost 5.75 points and ended a two-day bounce. It looks like the large-cap index is stalling at resistance near its recent highs in the 1810-1813 zone. If this pullback continues the 1780 level should be support.

chart of the S&P 500 index:

The NASDAQ composite only lost -0.2% and looks the strongest of the major market indices. Should this pullback continue we can look for potential support at its 10-dma at 4046 (not likely to hold) or the 4,000 level. A breakdown below 4,000 might portend a drop toward its simple 50-dma.

chart of the NASDAQ Composite index:

The small cap Russell 2000 index delivered the worst performance among the major indices with a -0.89% decline. The $RUT settled near what should be short-term support in the 1120 area. If this dip continues then we're likely to see the $RUT test one of its rising trend lines of higher lows, mostly likely near the 1100 level.

chart of the Russell 2000 index

We only have fourteen trading days left in 2013. Typically the second half of December tends to be positive for stocks. Fund managers have had a terrible year and most are trailing behind the S&P 500's +26% gain for the year. That means there should be a crowd of money waiting to buy the dips as money managers chase stocks higher. I am encouraged by tonight's news that we have a two-year U.S. budget deal that should pass a vote in both the congress and the senate. This removes a potential overhang for the stock market.

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