Are the Markets Under a Worry Watch?

“Good” news but not “too good” set off a Friday stock market rally as major U.S. indexes posted weekly gains.

Major U.S. stock market indexes rallied on Friday after the monthly Non-Farm Payroll Report showed modest employment gains while unemployment climbed from 7.5 percent to 7.6 percent. The last few weeks in the stock market have been all about good news/bad news. Is good news “good” or is bad news “good” as investors try to determine the next moves by the Federal Reserve in regards to its quantitative easing program?

For the week, the Dow Jones Industrial Average (NYSEARCA:DIA) added 0.9 percent, the S&P 500 (NYSEARCA:SPY) climbed 0.8 percent, and the Nasdaq (NYSEARCA:QQQ) climbed 0.4 percent.

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On My ETF Radar

While major U.S. stock market indexes rallied, the overall action remains tepid on mediocre volume, flattening momentum and within the confines of the recent trading range. A glance at the chart of the Dow tells the story.

Chart courtesy of StockCharts.com

In this simple chart, we can see how the Dow has been correcting since reaching its recent high in late May and now has bounced off its 50-day moving average (blue line) which is always seen as significant support. Nevertheless, in the chart of the S&P 500 below, we can see what the bigger picture has to say.

Chart courtesy of StockCharts.com

Recent stock market action has generated a “sell” signal in the S&P 500 with a downside price objective of 1520, 7.5 percent below Friday’s closing price. Strong support is at 1,600 while a break above 1,660 would mark the resumption of the recent uptrend.

All of this will depend upon the stock market’s reaction to the Federal Reserve’s impending withdrawal of its easy money programs and if “good” news is good or “good” news is bad as the stock market’s good news/bad news joke continues.

ETF News You Can Really Use

It seems clear that the Fed is telegraphing its next moves in an attempt to begin its process of disengagement from quantitative easing without roiling financial markets, however, most analysts agree that it will be a complicated and high risk maneuver with markets so dependent and habituated to easy money.

To date some markets clearly don’t like the news as evidenced in the charts of iShares Real Estate Trust (NYSEARCA:IYR) and the 30-Year U.S. Treasury Bond. (NYSEARCA:TLT)

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Chart courtesy of StockCharts.com

Chart courtesy of StockCharts.com

For the week, “good” news was found in the U.S. Non Farm Payrolls report and home prices which increased, falling initial jobless claims, and U.S. PMI, which posted 52.3 and beat expectations.

Bad news came in the form of a shocking U.S. ISM manufacturing report which dropped to 49, missing expectations and putting the U.S. manufacturing sector back into contraction territory, the first contractionary reading since 2009. U.S. construction spending and April factory orders were weak and missed expectations.

Japan remains in chaos as the Nikkei Index (NYSEARCA:EWJ) approaches bear market territory and over the weekend, China reported slowing exports growth and declining imports. Exports climbed 1 percent in May, widely missing a forecast gain of 7 percent, and imports fell 0.3 percent instead of meeting forecasts of a 6 percent gain. Exports to the United States and Europe, China’s top two trading partners, fell 1.6 percent and 9.7 percent, respectively, logging in a full quarter of declining numbers. The country’s producer price index declined 2.9 percent for May, larger than expected, and data on lending, property investment and industrial production, while all positive numbers, showed trends towards decline or leveling off as China’s economy continues to cool.

Back at home, next week brings major U.S. domestic economic news on Thursday with May Retail Sales and a wave of reports on Friday that include producer prices, industrial production and consumer sentiment.

Bottom line: Will “good” news be bad or will “bad” news be good as we head into summer and the Fed meeting approaches? 

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

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