Are Stock Markets Drifting Calm Ahead of a Big Wave?

U.S. ETFs and stock indexes continued drifting sideways on low volume below significant resistance.

U.S. ETFs and major stock indexes were mixed on Wednesday as investors digested a tepid retail sales report and last night’s State of the Union Address.

etfs, spy, dia, qqq, sector selector all market update - flatFor the day, the Dow Jones Industrial Average (NYSEARCA:DIA) fell 13 points to close at 13, 982 and once again give up the closely watched and technically important 14,000 level.

The S&P 500 (NYSEARCA:SPY) gained 0.06%, the Nasdaq 100 (NYSEARCA:QQQ) gained 0.4% and the Russell 2000 (NYSEARCA:IWM) climbed 0.33%.

In other major markets, oil (NYSEARCA:USO) lost 0.57% to close at $97.01/bbl and gold (NYSEARCA:GLD) fell 0.39% to close at $1645.10.

Major stock and ETF indexes have been trading in a very tight range for the past several days on very low volume

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Factors influencing today’s action include the retail sales report which showed a 0.1% gain for January compared to 0.5% in the previous month as tax increases apparently start to bite consumer spending.  Other fundamental headwinds have been generated by the upcoming battle over the “sequestration” cuts scheduled for March 1st and mixed reaction to the State of the Union speech…

On a technical level, major ETF indexes and stocks remain at overbought levels with weakening momentum as the market seems to have exhausted itself after the recent New Year rally.  Also, major stock indexes are close to all time highs which represent a multi-year triple top and significant resistance…

Bullish sentiment among financial advisers, hedge funds and retail investors remains high, which is typically a contrarian indicator that some take as a “sell” signal.

However, not all institutions are overly bullish as Goldman Sachs put a downgrade on U.S. stocks earlier this week from overweight to neutral for the next three months. However, Goldman remains “overweight” for the next 12 months.

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Swiss based UBS issued a similar statement, saying that many of its indicators look “stretched.”  The bank says that its world index is approaching overbought territory.  However, like Goldman Sachs, UBS remains bullish for 2013 as a whole.

Tomorrow’s economic reports are light with just weekly jobless claims on the calendar.

Bottom line:  ETFs and stocks continue drifting sideways in a narrow range, hampered by technical and fundamental factors.  Big issues coming up will be the “sequestration” debate between the White House and Congress and whether momentum will continue decline in the face of heavy technical resistance near all time highs for major stock and ETF indexes.

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