Are the Bulls Charging for a Big Breakout Rally?

U.S. exchange traded funds and stocks drifted higher ahead of earnings season.

spy, dia, qqq, iwm, earningsiscal cliff, etf, exchange traded fundsMajor U.S. stocks and exchange traded funds drifted higher to a much ballyhooed five year high as investors bet on positive sentiment and a friendly upcoming earnings season.

For the day, the Dow Jones Industrial Average (NYSEARCA:DIA) gained 0.6%, the S&P 500 (NYSEARCA:SPY) added 0.76%, the Nasdaq 100 (NYSEARCA:QQQ) climbed 0.61% and the Russell 2000 (NYSEARCA:IWM) inched up 0.2%.

In Europe, the European Central Bank left interest rates unchanged.

In U.S. economic reports, weekly jobless claims rose to 371,000, up from 357,000 and missing expectations, but still U.S. exchange traded funds saw enough hope to hold on to today’s gains.

The big news on Friday will come with earnings from Wells Fargo (NYSE:WFC) which are due before market open.  Next week will bring a storm of earnings reports that will likely have major impact on the future direction of exchange traded funds.

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Two Federal Reserve presidents warned today that the Fed’s zero interest rate policy could spark inflation down the road.  Kansas City Federal Reserve President Esther George joined St. Louis President James Bullard in saying that ultra loose monetary policy could create imbalances in the economy that could have negative impacts regarding inflation and employment in the future.  Mr. Lacker has been a long time Fed hawk and the only negative vote regarding the Fed’s quantitative easing policies.  The Fed has been buying up $85 billion in assets/month to stimulate growth and the economy.

On a technical basis, major stock and exchange traded fund indexes like the S&P 500 (NYSEARCA:SPY) and Nasdaq 100 (NYSEARCA:QQQ) now stand just below significant resistance levels that will have to be cleared if this rally is to actually be meaningful and sustainable.

Bottom line: Sentiment becomes more bullish as major U.S. stocks and exchange traded funds drift higher, however, earnings season and the upcoming budget ceiling debate and fiscal cliff spending cuts cast a shadow for the future.  Technical factors for exchange traded funds look more positive yet require confirmation before this rally can continue.

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