Can the Stock Markets Keep Denying Fundamental Headwinds?

 Major U.S. stock market indexes hit all time highs this week on low volume and declining momentum

U.S. stock market indexes closed out a holiday-shortened week with new record closing highs for the Dow Jones Industrial Average (NYSEARCA:DIA) and the S&P 500 (NYSEARCA:SPY).

The S&P 500 set a new closing high of 1569.19 on March 28, but missed its all-time intraday high of 1576.09, last seen on October 11, 2007. The Dow Jones Industrial Average set another closing high on Thursday at 14,578. Both major U.S. stock market indexes posted double-digit gains for the first quarter, and the bullish stock market action came in the face of headwinds from Cyprus and uncertainty in Europe and less-than-bullish economic news at home.

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The Nasdaq 100 (NYSEARCA:QQQ) gained o.31 percent, finishing the quarter up 8.3 percent from its opening price, while the Russell 2000 (NYSEARCA:IWM) gained 14 percent for the first quarter.

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Chart courtesy of StockCharts.com

In the chart above, we can see how the S&P 500 is in overbought conditions with slowing momentum. The S&P 500 and Dow Jones Industrial Average also continue climbing amidst overall volume that is approximately 20 percent below average and now the S&P 500 is against the upper band of its current trend line.

ETF News You Can Really Use

The good news last week was the rising Case-Shiller home price index and gains in consumer confidence, spending, and income. Q4 GDP was revised upward to 0.4 percent, but missed estimates of a 0.5 percent gain. Less rosy statistics came from initial jobless claims, which jumped unexpectedly, and also unexpected falling home sales.

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The Crisis in Cyprus continued, with the banks reopening amid capital controls and back and forth disputes over whether or not the country would be a “template” for other troubled European countries. Reports indicate that large, uninsured depositors could lose up to 60 percent of their assets in the forced restructuring of the country’s two major banks.

Chicago PMI fell unexpectedly to 52.4, still in expansion territory but below expectations, and many foreign stock exchanges, including the German DAX and Shanghai stock indexes, lost ground for the week.

Upcoming Economic Reports

This week brings an impressive array of economic reports that could be stock-market moving. These include:

Monday: March Markit PMI, March ISM Manufacturing, February Construction Spending

Tuesday: March auto sales, February Factory Orders

Wednesday: March ADP private sector payroll report, March ISM services

Thursday: Weekly Jobless Claims

Friday: March Unemployment, March Non Farm Payrolls Report

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Bottom line: The U.S. stock market indexes continued climbing against fundamental and technical headwinds. The important factors this week will be the situation in Europe as Cyprus struggles with its crisis and investors watch for signs of capital flight and contagion spreading through the southern tier of Europe. The “best six months of the year” for the stock market are rapidly drawing to a close as we come to “sell in May and go away” and several major technical indicators are close to “sell” signals.

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

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