Are Stressful Weeks Ahead for Investors?

Dow Jones Industrial Average drops 1.2 percent for week as political squabbles continue.

The Dow Jones Industrial Average (NYSEARCA:DIA) managed to reclaim the psychologically important 15,000 level on Friday but dropped 1.2 percent on the week as investors worried about the political deadlock in Washington. The S&P 500 (NYSEARCA:SPY) also gained on Friday but shed 0.1 percent for the week. The Nasdaq Composite (NYSEARCA:QQQ) went the opposite way with a gain of 0.7 percent, while the Russell 2000 (NYSEARCA:IWM) gained 0.4 percent from the previous Friday’s close.

Gold (NYSEARCA:GLD) dropped 2.2 percent for the week to settle at $1311/oz. on Friday. Oil (NYSEARCA:USO) gained 0.8 percent to close at $103/bbl.

On My Stock Market Radar

In the chart of the Dow Jones Industrial Average (NYSEARCA:DIA) we can see that relative strength and momentum are declining, as represented by RSI and MACD in the upper panels.

Chart courtesy of StockCharts.com

The index has put in a double top at the 15, 700 level and the price trend is down. The Dow Jones Industrial Average (NYSEARCA:DIA) has also broken its 50 day moving average which also is starting a downtrend. Significant support rests at 14,800 and the 200 day moving average at 14,704. Should those levels be broken, a reasonable target would be the 13,800 level, approximately 8 percent below current levels and 12 percent below recent highs.

During the last debt ceiling debate and the downgrade of the U.S. credit rating in 2011, the Dow Jones Industrial Average (NYSEARCA:DIA) and S&P 500 (NYSEARCA:SPY) both fell approximately 20 percent and some analysts forecast the possibility of a similar move over the next two weeks as the debt ceiling limit of October 17th approaches.

Should that occur, the downside target for the Dow would be in the region near 12, 560, 16 percent below current levels and 20 percent below recent highs.

Stock Market News You Can Really Use

All the stock market action last week was driven by news headlines from Washington as Republicans and Democrats bickered over the government shutdown as the shutdown entered its 5th day on Saturday. The deadlock shows no sign of easing as the clock ticks towards October 17th, and now it looks increasingly likely that the two debates, the budget and debt ceiling, will be merged into one as the mid month deadline approaches.

President Obama cancelled his trip to Asia to focus on the deadlock and no one expects the dispute to result in a default by the United States. However, the uncertainty over the next two weeks is likely to lead to extreme volatility in equity and bond markets. Analysts are split over the long term impact with some suggesting that the selling will be short lived while others see potential for significant double digit declines.

The impact of the government shutdown grows with each passing day, of course, and estimated to be $300 million/day, and is starting to ripple through the broader economy as defense contractors start laying off workers. President Obama referred to the effects as “heartbreaking” as government aid programs have been shutdown or curtailed.

VIX, (NYSEARCA:VXX) the CBOE S&P 500 Volatility Index, also known as the “fear” index, has been spiking higher in recent days as investors and traders hedge for increased volatility.

 

Economic data was slim last week as the important monthly Non Farm Payrolls and Unemployment reports weren’t published on Friday due to the shutdown; next week marks the start of earnings season which will be closely watched to observe the health of major U.S. corporations. Earnings forecasts have been revised downwards compared to recent quarters which could also add pressure to financial markets.

This week’s economic reports include:

Wednesday: FOMC Meeting minutes
Thursday: weekly jobless claims,
Friday: retail sales, University of Michigan confidence

Earnings season starts this week with Alcoa (NYSE:AA) and Yum! Brands (NYSE:YUM) on Tuesday, Costco (NASDAQ:COST) and Family Dollar (NYSE:FDO) on Wednesday, and JP Morgan (NYSE:JPM) and Wells Fargo (NYSE:WFC) on Friday.

Bottom line: Expect intense volatility as the political drama unfolds and earnings season gets underway. Opportunities will abound for short-term traders, while longer-term investors face a muddled and potentially stressful few weeks ahead.

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

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