U.S. Stock Market Indexes and ETFs Stand at Trading Inflection Point

After reaching new highs not seen since June, 2008, major U.S. stock market indexes stand at a major crossroads.

Major U.S. indexes ground modestly higher last week to reach new multi-year highs but remain in technical “red zones” and facing significant fundamental challenges.  This confluence of events leaves global financial markets at a major crossroads.

 On My Wall Street Radar

S&P 500 (<a target=

A quick glance at the chart of the S@P 500 (NYSEARCA:SPY) shows us that the index is in a bullish configuration with a price objective of 1670.  However, it is also bouncing along below major resistance levels at 1365-1370 which it has failed to surmount and is represented by the red line in the chart above.  Major support rests at 1290, as represented by the black line, and a glance at the long column of Xs shows how overextended the index is relative to the start of this move.

Conventional indicators like RSI are also at very overbought levels with a reading of 70.15 which is considered the “red zone” and levels from which corrections often take place.  Other major U.S. stock indexes like the Russell 2000 (NYSEARCA:IWM) and the Dow Jones Industrial Average (NYSEARCA:DIA) find themselves in similar positions with high RSI readings and channeling sideways at significant resistance levels.

On Friday, VIX, the CBOE “fear gauge,” rose along with stock prices which usually doesn’t happen as the two are typically uncorrelated, and this kind of action indicates growing fear in the market in spite of rising prices.  Finally, VIX below 20 oftentimes precedes major sell offs, as does RSI above 70.  Confirming negative sentiment going forward, the Dow Jones Transportation Average has not participated in recent gains with the index rolling over and declining by some 4% over the last 14 trading days.

On the upside, bulls can say, correctly, that a break above 1370 would likely bring more buyers off the sidelines as the fear of being left behind replaces the fear of loss that usually drives markets lower.

However, the best overall probability from a technical standpoint says that we’re in a bull market, severely overbought and subject to a measurable correction at any time. 

 The Economic View From 35,000 Feet

Last week’s economic news was mostly positive as the Greek bailout moved ahead and bond prices generally rose in Europe.  However, the G20 continues wrangling this weekend over increasing the “firepower” of its rescue mechanism and everyone wants Europe, and particularly Germany, to step up with more money before countries outside the Euro Zone pony up more cash to save Europe.  European stock markets were mixed with The Vanguard MSCI European ETF (NYSE:VGK) showing small gains as the Greek Tragedy continues and seemingly never can get to the final curtain.

At home, economic news was largely positive with unemployment claims continuing to fall, consumer confidence rising to yearly highs and new home sales improving.

On the negative side of the ledger, Europe appears now certainly to be entering recession with its PMI dropping below 50 and Germany showing contraction in its economy for the 4th Quarter of 0.2%.  The European Commission expects the entire Euro Zone to contract 0.3% this year with Italy and Spain registering declines of more than 1%, all of which will make it more challenging for the zone to bolster its weaker members that are forecast to slide into deeper recessions.

Of course, the biggest potential negative for today is the parabolic move higher in oil prices with West Texas Intermediate Crude (NYSEARCA:USO) at $109.45 and Brent Crude at $125.47, a more than 10% gain since the start of February.  With gasoline prices topping $3.65 nationally and over $4.00 in California and Hawaii, one can only wonder how long it will take for these levels to add more headwinds to the economic picture in the United States.

This week will see important economic reports in the areas of home sales, Federal Reserve Manufacturing Reports, Durable Goods, Home Prices, Consumer Confidence and jobs.  Particularly newsworthy reports come on Wednesday with a 4th Quarter GDP estimate, February PMI and Fed Beige Book which are followed on Thursday by the widely watched February ISM Report from the Institute of Supply Manufacturing.

Bottom Line for ETF Investors

Global markets stand at a crossroads and now face significant technical and fundamental challenges as February draws to a close.

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

To contact the reporter on this story: John Nyaradi at staff.writers@wallstcheatsheet.com

To contact the editor responsible for this story: Damien Hoffman at editors@wallstcheatsheet.com