US STOCKS-Markets fall after Fed unveils stimulus plan

Wed Nov 3, 2010 2:59pm EDT

* Fed announces plan to buy $600 bln in gov't bonds

* "Not surprising to sell on the news" -- strategist

* Indexes off: Dow 0.3 pct, S&P 0.3 pct, Nasdaq 0.2 pct

* For up-to-the-minute market news see [STXNEWS/US] (Updates with Fed statement, changes byline)

By Ryan Vlastelica

NEW YORK, Nov 3 (Reuters) - U.S. stocks fell after a brief pop higher in volatile trading on Wednesday after the Federal Reserve announced a controversial policy to buy government bonds in an attempt to breathe new life into the struggling U.S. economy.

The Fed will buy a further $600 billion of government bonds by June 2011, a package that was larger than expected. The central bank also described the economy as "slow" and said employers remained reluctant to add to payrolls. For details, see [ID:nN03120542].

"The Fed is still very worried about the potential for deflation, and their comments on employers suggests that Friday's payroll number could be disappointing," said Nicholas Colas, chief market strategist at the ConvergEx Group in New York.

The Dow Jones industrial average .DJI dropped 32.24 points, or 0.29 percent, to 11,156.48. The Standard & Poor's 500 Index .SPX dropped 3.48 points, or 0.29 percent, to 1,190.09. The Nasdaq Composite Index .IXIC dropped 5.00 points, or 0.20 percent, to 2,528.52.

The inverse correlation between stocks and the U.S. dollar was evident, with the greenback rising after the statement. The CBOE Volatility index .VIX, a favored gauge of investor anxiety, fell 1.3 percent in volatile afternoon trading. The index usually moves inversely with the S&P 500, tracking option prices investors are willing to pay as a protection on the underlying stocks.

Markets had traded lower earlier as investors awaited details on the quantitative easing plan and digested the results of Tuesday's elections in which Republicans regained control of the House and made inroads in the Senate, as expected.

"The Republican victory and quantitative easing are both net positives for the market, but it's not surprising that we would sell on the news," said Alec Young, equity strategist at S&P Equity Research in New York. "I don't think there's a break in the trend, however, which remains up."

The S&P 500 has recently been unable to break and hold above its 200-week moving average, now slightly above 1,193 and on a downward slope. The index has gained about 14 percent since the start of September on the hope of Fed action and Republican electoral victories. [ID:nSGE6A205O].

Weighing on stocks, the dollar edged up 0.2 percent against a basket of currencies .DXY. The 50-day correlation between the dollar index and the S&P 500 stands at -0.93, with -1 being a perfect inverse correlation. <^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^ For stories on the U.S. elections: [ID:nUSVOTE] For a graphic on the election results:

link.reuters.com/wav53q For a special report on Fed quantitative easing:

link.reuters.com/pyb23q

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In company news, Time Warner Inc (TWX.N) fell 1.9 percent to $31.78 after the media company reported its third-quarter results. [ID:nN03285141]

Housing stocks also fell after PulteGroup Inc (PHM.N) posted an adjusted third-quarter loss that widened from the prior year. The stock lost 7.1 percent to $7.50. [ID:nN0355645] (Reporting by Ryan Vlastelica; Editing by Kenneth Barry)

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