Are We Headed for a Volatile Market Week?

Major U.S. stock indexes put on a fireworks display to end last week, with the Dow trying for 15,000 and the S&P 500 closing above 1,600.

Last week was all about central banks and headline news as the European Central Bank cut interest rates and Wall Street celebrated a better-than-expected Non Farm Payrolls report on Friday.

The Dow Jones Industrial Average (NYSEARCA:DIA) saw its first intra-day high above 15,000, but missed a close above this lofty level on Friday, settling at 14,973. However, the S&P 500 (NYSEARCA:SPY) reached an all-time closing high milestone of 1,614. For the week, the Dow climbed 1.8 percent, the S&P 500 gained 2 percent, and the Nasdaq Composite (NYSEARCA:QQQ) gained 3 percent.

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The S&P 500 managed to settle above the 1,600 milestone for the first time. The last time it crossed 1,500, the last century landmark, was in March 2000 — just before the “dot-com” crash that started soon after.

On My ETF Radar

Major stock indexes, including the S&P 500 and the Dow remain overbought and overextended in spite of the new highs being made seemingly on a daily basis.

Chart courtesy of StockCharts.com

In the chart above, you can see how the percent of stocks in the S&P 100 above their respective 200-day moving averages is at extreme high levels from which moderate-to-major declines have previously started. The top graph is of the weekly S&P 500, and the lower graph highlights the rise and fall of the percentage of stocks above their 200-day moving averages.

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It’s easy to see how levels similar to the current level preceded significant declines in the S&P 500 while a rising percentage is closely correlated to a rising S&P 500 index. Current extreme highs have been in place since just after the start of 2013, and as these high peaks tend to last for just a few months, the most likely next move for the S&P 500 and Dow Jones Industrial Average will be down and could most likely start before the end of June.

ETF News You Can Really Use

Last week’s rally in the Dow Jones Industrial Average and other major stock indexes was fueled by the European Central Bank cutting its interest rates, the Federal Reserve saying it was sticking to its quantitative easing program and may increase or decrease it going forward, and the better-than-expected payroll report on Friday.

The Friday jobs report came in at 165,000, which was better than expected. The previous two months were also revised upward. However, beneath the surface, items like hours worked, underemployment, and overall labor force participation pointed to a still weak job market. Hours worked declined to the lowest levels of the year, and overall income declined as well. The Labor Force Participation Rate is at a record low 63 percent, and the employment to population ratio is at low levels not seen in the last 30 years.

The earnings season is coming to a close, and most would describe the results as modest as best, as profits generally rose but top line sales and revenues, along with forward-looking guidance, tended to disappoint.

Nevertheless, bad news continues to be OK and good news continues to be great as the current stock market rally continues. Many analysts suggest that now there is a grand disconnect between financial markets and the real economy, and bubbles are being formed. Fundamentals eventually catch up to bubbles and “irrational exuberance” as we’ve seen so many times before.

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So the new highs in the Dow Jones Industrial Average come without any sort of any significant correction and in the face of significantly negative economic news.

Aside from the better-than-expected jobs report on Friday, European PMI remains in contractionary territory, March Factory Orders vastly missed expectations with a decline of 4 percent, ISM manufacturing fell perilously close to contraction territory with a print of 50.7, and the Chicago PMI slid to 49 and was a huge miss on expectations of 52.5.

Overseas, the news was similar, with the China PMI sliding closer to contraction territory with a print of 50.6, along with a decline in German PMI as Europe’s strongest economy grows weaker by the month.

But in the end, markets rallied on the continued faith in central bank intervention and its ultimate success, which even members of the Federal Reserve are beginning to doubt.

This coming week is light on economic news — with job openings on Tuesday, weekly jobless claims on Thursday, and the federal budget on Friday. Earnings season is winding down, with major reports expected from Walt Disney (NYSE:DIS) and Priceline.com (NASDAQ:PCLN).

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Market Summary:

Economic Fundamentals: Mixed

  • Slowing global growth
  • Slowing U.S. growth
  • Ongoing global central bank intervention

Technical Indicators: Mixed

  • Uptrend
  • Overbought
  • Low volume
  • Narrow breadth

Seasonality: Negative

  • Sell in May and go away
  • “Worst six months of the year”

Bottom line: Mixed fundamental and technical factors combined with continued central bank intervention could make for a volatile week ahead.

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

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