Stock Markets Rally into Hopeful Fiscal Cliff Resolution Sentiment

U.S. stocks and ETFs rallied in the holiday shortened week and now turn to challenges in Europe and the fiscal cliff.

Global markets and ETFs rallied in the short week on light volume and now look towards a full week with the clock ticking towards December 31st and the fiscal cliff, now just 36 days away.  Furthermore, the House and Senate have only twelve days in session before they close up for the year on December 14th.

On My ETF Radars&p 500, spy, nysearca:spy, stock market, etf

In the point and figure chart above, we can see how the S&P 500 (NYSEARCA:SPY) is still in a bearish configuration in spite of last week’s rally which returned the short term picture to “Xs” which indicates that demand is in control for the short term.  Longer term, the S&P 500 (NYSEARCA:SPY) is still on a “sell” signal and below its red bearish resistance line which indicates bear market conditions.

Significant resistance lies just ahead at the 1420-1440 level.

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Last week’s rally was powerful but on light volume and broke no new ground in terms of a trend change or market condition.

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Major U.S. indexes and ETFs advanced for the week with the Dow Jones Industrial Average (NYSEARCA:DIA) adding 3.4%, the S&P 500 (NYSEARCA:SPY) gaining 3.6% and the Nasdaq (NYSEARCA:QQQ) climbing 4% over the holiday shortened week.  It was a short, low volume week but that is now in the rear view mirror as traders and institutional managers return from vacation.

News from China was positive as the country’s PMI rose to 50.4 in November to put it back into expansion mode.

In Europe, finance ministers were unable yet again to reach a deal on Greece and tensions were defused in the Middle East with a cease fire agreement between Hamas and Israel.  However, the Middle East is never peaceful for long as protestors gathered in Cairo to protest what is apparently a strong arm takeover by new President Morsi that triggered a stock market plunge of more than 9% on Sunday.

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In economic reports, housing starts were up, along with the home builder’s index and existing home sales as strength continued in the important housing and building sector.  Weekly jobless claims declined.

On the negative side of the ledger, University of Michigan consumer confidence declined along with leading indicators.

Moody’s downgraded France to AA1 from AAA and the rating agency assigned France a negative outlook based on high debt loads, unemployment and uncompetitiveness that could be a bigger problem than Greece or Spain over the long run.

This development is bad news for the government of Francoise Hollande and for Europe’s so far unsuccessful efforts at curbing the Greek debt crisis.  European leaders were also unable to agree upon a new budget last week that would extend for the next seven years as Germany and Britain clashed with France over future spending in Europe while the IMF balked at giving Greece its next round of bailout money.

The week is packed with economic reports with the Chicago Fed on Monday, durable goods, Case/Shiller housing and consumer confidence on Tuesday, new home sales and Fed Beige book on Wednesday, weekly jobless claims, Q3 GDP revision and pending home sales on Thursday and income, spending and PMI on Friday. What to watch: Durable goods, beige book, Q3 GDP, PMI.  Progress or lack thereof in the fiscal cliff negotiations.

Bottom line: Markets are counting on a resolution to the fiscal cliff, progress on Greece and continued positive economic reports to justify and confirm last week’s strength.  Any disappointment in these areas will likely lead to more volatility and headwinds for global stocks and ETFs in the week ahead.

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John Nyaradi is the author of The ETF Investing Premium Newsletter.