Is Defense the Best Offense in Volatile Trading Week Ahead?

Black swans seem everywhere as we have a nuclear accident in Japan (NYSE:EWJ), war and revolutions in the Middle East, demonstrations in Britain, and a looming U.S. Government shut down on April 8th.

At Wall Street Sector Selector, we remain in the defensive mode, as black swans fly across the globe.

On My Radar

Another volatile week is now in the books and yet another lies ahead.

In the chart of the S&P 500 (NYSE:SPY) above, we see that Friday’s close brought a “shooting star” which is composed of a gap higher at the open, higher prices during the day and then a close near the open.  Within the context of an uptrend, this is a bearish pattern, as buying momentum petered out during the day.

We also see overhead resistance just ahead at the 1320-1330 level, while MACD at the bottom would contradict the bearish signs with a turn up and signal cross, albeit one that is still below the “0” line.

On the Bullish Percent Chart below, we see that supply dominates the market and that the index is in a “bear alert” and still close to overbought levels near 70%.

So on a technical basis, things appear to be mixed to bearish, notwithstanding last week’s snapback rally.

The View From 35,000 Feet

On the fundamental front, the news was mixed, as well:

Bullish News: GDP revised upward from 2.8 to 3.1%, Unemployment Claims down

Bearish News: February Existing Home Sales down, New Home Sales at record lows, Durable Goods Orders down, Michigan Consumer Sentiment down.

Around the world, the drama continued in the Middle East as the rebels gained the upper hand in Libya, thanks to the NATO (read U.S.) no fly zone and bombing against Gaddafi assets, while Syria probably deserves to be bombed, as well, with Friday demonstrations leading to security forces firing into and killing numerous members of the civilian crowd.

In Europe, a quarter million people gathered in Britain to protest the “austerity” proposals while Portugal suffered credit downgrades, spiraling bond costs and seemed to accelerate on its wild ride towards an ECB bailout.

The sad drama in Japan continues to unfold as the nuclear plants appear to be yet uncontrolled with 1200 times the legal limit of radiation being measured in the sea near the plant. (Somehow 1200 times the legal limit remains below the level considered harmful to humans and the Japanese fishing industry.)  Now it appears that a leak at one of the reactor cores is possible and the U.S. military is considering mandatory evacuations of its mammoth Yokosuka naval base.

Damage estimates put the disaster at the level of four Katrinas, making it the most expensive natural disaster the world has ever seen, and global car production is being impacted both in Japan (NYSE:EWJ) and at home as supply chains shut down.

1/3 of global auto production could be impacted with a total of approximately 5 million cars not being built this year out of a planned 72 million.  Toyota (NYSE:TM) is shuttingdown domestic manufacturing in Japan along with shuttering factories in Canada, the U.S. and Mexico, GM (NYSE:GM) shut a plant in Louisiana and Ford is closing one in Belgium.

The Canadians ousted their government, apparently not wanting to be outdone by the Portuguese who’s leader resigned earlier in the week over the Parliament’s rejection of the austerity plan to curb their deficit.

With demonstrations in Britain, the downfall of the government in Portugal and growing unrest in Germany, one can only conclude that this whole austerity idea isn’t going down too well on the Continent.

Of course the same could be said of our situation here in the United States where the news is less dramatic but still volatile.

President Obama will face the nation on Monday night to explain/justify the Libyan operation while Congress grapples with the budget morass and faces a rapidly approaching deadline of April 8th at which point the government officially runs out of money and faces a shutdown.

And let’s not forget the small item that “Obama Care” will be 8% more expensive than forecast and that there’s a $2.3 Trillion gap between the U.S. Congressional Budget Office’s estimates of the budget deficit over the next ten years of $9.5 Trillion versus the White House estimate of $7.2 Trillion.

But what’s $2.3 Trillion among friends, and who’s counting anyway as Dr. Bernanke continues buying nearly all of the U.S. Treasury bonds that come up for sale in these “Alice in Wonderland” days.

What It All Means

The black swans continue flying, and more and more the story becomes a simple war between the central banks of Europe, Japan and the United States and the black swans that circle the globe.

The Week Ahead

A huge week of data lies ahead that clearly have the power to move the markets up or down.  Friday will be a monster with news on employment, manufacturing construction spending and car sales.

Monday: February Personal Income, February Personal Spending, January Pending Home Sales

Tuesday: January Case/Shiller Home Price Index, March Consumer Confidence

Wednesday: March Challenger Job Cuts, March ADP Employment

Thursday: Initial Unemployment Claims, Continuing Claims, March Chicago PMI, February Factory Orders

Friday: March Non Farm Payrolls, March Unemployment, March ISM, February Construction Spending, April Car/Truck Sales

Sector Spotlight

Leaders: (NYSE:ECH) iShares Chile (NYSE:EZA) iShares South Africa, (NYSE:SLV) iShares Silver

Laggards: (NYSE:TLT) iShares 20 Year Treasury (NYSE:REM) iShares FTSE NAREIT Mortgage REIT

Last week I was in Osaka, Japan, which is well south of the nuclear accident and where life seemed completely normal.  However, the area north of Tokyo is obviously another, tragic story.

Disclosure: No positions in ETFs or stocks discussed in this article.

John Nyaradi is the author of Super Sectors: How To Outsmart the Markets Using Sector Rotation and ETFs.