Can the Rising Stock Market Break Out to New Heights This Week?
U.S. stock and ETF indexes move sideways for the week.
U.S. stock and ETF indexes closed mostly higher on Friday and mixed for the week as they digest recent gains and continue trading below significant resistance.
On My ETF Radar
A quick glance at the chart of the Dow Jones Industrial Average (NYSEARCA:DIA) gives a clear picture of the present situation. The Dow Jones Industrial Average and its related ETF are near overbought territory at 66 on both daily and weekly RSI and this is a level from which declines oftentimes start. Momentum is waning, as represented by MACD, and it’s quite clear how price has stalled at just below the 14,000 level on the average.
No further upside move is possible without clearing the 14,000 level and holding above that level, and it’s quite likely that move will not be possible without a decline first to work off overbought conditions. There is significant support around 13,300, 13,400 and 13,900 and so one could expect those levels form a floor, at least temporarily, for any upcoming downside move…
VIX, the S&P 500 Volatility Index, also known as the “fear index,” fell 3.56% on Friday, and VIX ETNs also declined with iPath S&P 500 Short Term Futures ETN (NYSEARCA:VXX) losing 2% and VelocityShares Daily 2X VIX Short Term ETN (NYSEARCA:TVIX) dropping 3.8%.
”Fiscal Cliff 2:” Sequestration Countdown
March 1st marches closer with its $1.2 Trillion in automatic government spending cuts to both domestic and social programs over the next ten years if Congress and the White House can’t come up with a compromise solution to avoid it.
President Obama has been campaigning for a package of more taxes along with spending cuts, while Republicans are digging in for no more tax increases and just spending cuts to take place during this round of negotiations. Many analysts say that the magnitude of these cuts could trigger another recession, which could already be underway with the initial Q4 GDP printing a -0.1% reading.
Of course we’ve been here before, just remember the New Year Eve 11th hour settlement of “Fiscal Cliff: Part 1,” and both sides now seem to be no closer to agreement or compromise than they were in the summer of 2011 or last New Year’s Eve.
As the clock ticks, we can expect markets to get more nervous as people wonder if yet another 11th hour rabbit can be pulled out of the hat or if the politicians will once again defer judgement day yet for another day…
ETF News You Can Really Use
For the week, the Dow Jones Industrial Average (NYSEARCA:DIA) was mostly flat, sliding 0.1% for the week after a 48 point gain on Friday.
Volume was light as the East Coast hunkered down ahead of winter storm Nemo, with total volume off approximately 30% from recent averages.
Friday’s economic reports were light with the trade deficit and wholesale inventories declining in December.
Investors saw good news last week in initial jobless claims which declined, while the Institute for Supply Management Non Manufacturing Sector index rose to 55.2, well in expansion territory. January retail same stores are forecast to be positive and the CBO foresees a decline in the U.S. budget to $850 billion, the first time under $1 Trillion since 2008.
Individual investors have been particularly bullish as mutual fund deposits soared during January and advisers remain highly bullish, as well. Both of these conditions are usually seen as contrarian indicators that typically precede declines.
Next week in economic reports we’ll see the NFIB small business index on Tuesday, the closely watched January retail sales on Wednesday and the usual weekly jobless claims on Thursday. Friday brings a heavy day of economic data with the Empire State Index, Industrial Production and University of Michigan consumer sentiment reports.
Earnings season continues to wind down with notable reports from Avon and Coca Cola on Tuesday, Kraft and Cisco (NASDAQ:CSCO) on Wednesday, and General Motors and Pepsi on Thursday.
Bottom line: Stocks and ETFs continue languishing below significant resistance levels in overbought condition. Bullish sentiment is at extremes, cash levels are low and another round of bickering in Washington, D.C. is about to get under way.
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John Nyaradi is the author of The ETF Investing Premium Newsletter.