After Last Week’s Negative Economic Data, Here’s Your Cheat Sheet to the Trading Week Ahead

After a tough week around the world, global central banks and stock markets find themselves staring into the abyss of uncertainty and risk.  At Wall Street Sector Selector, we continue to feel comfortable with our inverse ETF and put option positions and expect lower prices ahead.

On My Wall Street Radar

The Dow Jones Industrials (NYSE:DIA) experienced its longest losing streak since 2004, now down five straight weeks in a row, and we find multiple sell signals across various major indexes and ETF sectors.

The DJIA (NYSE:DIA) and NASDAQ (NASDAQ:QQQ) are on Point and Figure “sell” signals, while the S&P 500 (NYSE:SPY) is at major support and now at a critical moment going forward.

In the chart of the S&P 500 (NYSE:SPY) above, we can see the index sitting on critical support at the 1300 level.  A break below here would put this index on a “sell” signal, joining the Dow Jones and NASDAQ (NASDAQ:NDAQ), as previously mentioned.

In upper corner, we can see that we’re still on a “buy” signal, but the “High Pole Warning” suggests that previous demand has given way to supply now being in control of this market on a short to mid-term basis.

The Economic News View From 35,000 Feet

The economic news last week was mostly terrible as we’ve previously discussed, however, three financial reports are worth revisiting within the context of the larger economic picture.

First the May ISM report came in at a dismal 53.5 compared to 57.1 expected and 60.4 previous.

This is a huge miss, is perilously close to the 50.0 level which demarcates the border betweeen expansion and contraction, the biggest monthly drop since 1984 and has significant negative implications for equities.

The second appalling report came on Friday with the government reporting that only 54,000 new jobs were created in May compared to 232,000 in April and the 125,000 forecast for May.  Most analysts say we need 100,000 new jobs/month just to break even with new entrants to the job market, so this is a pathetic figure, indeed.

Finally, home prices are in a confirmed double dip and now have fallen farther than even during The Great Depression.  The housing market is an abyss that truly appears to be bottomless as prices continue to fall.

So what to do about all of this?  I’ve heard and read all of the complaints and whining about where we are but how do we get out of this now?

One of the best thinkers on the landscape today, Robert Reich, founder of, Chancellor Professor of Public Policy at the University of California at Berkeley and Secretary of Labor under President Bill Clinton, had this to say on Friday in his article, “Back Toward a Double Dip.”

Whether you agree with Mr. Reich or not, his ideas would certainly put some real money back into the hands of the people instead of sending bundles of cash towards the big banks and “risk assets” as seems to have happened during “QE2.”

Across the Atlantic, the soap opera in Europe never seems to stop with German magazine, Der Spiegel reporting over the weekend that the rescue package could be 100 Billion Euros instead of the 60-80 Billion previously estimated.

That, of course, could be giving the “troika” made up of The European Commission, The European Central Bank and the International Monetary Fund a major headache as they stare into what increasingly looks like a bottomless abyss in Greece, a sort of Bermuda Triangle in the Aegean Sea.

What It Means for Stock Market and ETF Investors

What this means for us is that we face major risks ahead:

Here’s why.

After the Federal Reserve has put $2 Trillion onto its balance sheet, we’re now still faced with an incredibly weak economy and global stock market risks that seem to grow everyday.

“QE2” certainly has delivered preciously little bang for the buck as the primary beneficiary seems to have been rising stock prices and rising commodity prices and more liquidity for the big banks.  Other measurements of economic prosperity like Home Prices, Employment growth and GDP growth are extremely weak and tracking negative to very flat vectors.

Looking around the world, we see the never ending problems with Greece which could easily trigger a banking crisis across Europe, while in Japan the fallout from the tsunami will likely go on for years.

After “QE1” ended last year, the major indexes went into a significant correction, shedding some 17%, and now with “QE2” winding down, many analysts forecast a similar correction ahead.  We’ve all been trained to “buy the dips” since the Fed would step up to the plate and save the world, but for now, at least, there doesn’t seem to be any additional aid forthcoming from Dr. Bernanke and his friends for a multitude of political and economic reasons.  We’ll hear more from Dr.  Bernanke on Monday about any future plans for “QE3.”

Finally, the August 2nd deadline to raise the U.S. debt ceiling continues to be a steadily louder ticking clock as we march through the days of June.  For ETF and stock market investors, these are treacherous days as we look over the edge and into what could be a deep abyss in front of us.

The Business and Financial News Week Ahead

Major Issues/Themes: A quieter week of economic reports is on the schedule.

Tuesday: April Consumer Credit

Wednesday: Fed Beige Book

Thursday: Initial Unemployment Claims, Continuing Claims, April Wholesale Inventories

Friday: May Import Price Index, May Federal Budget

ETF Spotlight

Leaders: (NYSE:TUR) Turkey (NYSE:EWP) Spain

Laggards: (NYSE:IAT) Regional Banks (NYSE:ITB) Home Construction

Disclosure: No positions in ETFs or stocks discussed in this article.

John Nyaradi is the author of Super Sectors: How To Outsmart the Markets Using Sector Rotation and ETFs

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