Macro Economic News Sets the Stage for Next Big Market Move in Trading Week Ahead

Major stock market indexes continued to meander between significant support and resistance levels and this, of course, can’t go on forever.

Expect a breakout soon, possibly as early as this week, as we reach the end of the quarter and half year mark.

We continue to see significant risk to the downside in most ETF asset classes and believe that we are in a significant stock market correction within what is still a longer term uptrend, but an uptrend that faces growing threats on a daily basis.

We expect the next stock market directional move to be down and you can see our rationale for this bias below.

On My Wall Street Radar

In the chart of the S&P 500 (NYSE:SPY) above you can see how the index has fought off several attempts to breach the all important 200 Day Moving Average to the downside but successfully managed to stay above that level.

Resistance is on the upside at the blue 50 Day Moving Average and so we’re locked in this trading range that will need to be breached one way or other.

Macro news this week could set the stage for the next big move that we anticipate.

The Economic View From 35,000 Feet

It was another poor week on the economic front as economic news and earnings continued to disappoint.

The big event was Dr. Bernanke’s press conference in which he declared the expected end of quantitative easing and that the recovery is proceeding at a less than desirable pace, but proceeding nevertheless and that he has no plans to change monetary policy for the time being.

For market participants who were hoping for “QE3” the meeting was a big disappointment as Dr. Bernanke made it quite clear that the situation today is considerably different from that of last August and that there are growing costs to more easing by the Fed.

However, he did say that the Fed would reinvest principal from maturing assets and so continue propping up the markets through what’s being called “QE Lite” by keeping their balance sheet at record levels.  My friend, Keith Fitzgerald from Moneymorning.com does a great analysis of this in his Thursday article, The U.S. Federal Reserve Plan For QE3 – And Why It’s a Done Deal

The second major news story is the ongoing soap opera over the deficit reduction talks going on between the White House and Congress.

These people are not playing with fire here, but rather a nuclear bomb, as the clock ticks ever closer to Armageddon on August 2nd when the United States “goes bust.”

With Republican leaders digging in against revenue increases and walking out on the meetings, one can only wonder if they understand what will happen if there is a breach of “the full faith and credit of the United States government” or even if there is the hint of such a possibility as August 2nd approaches.  One can only imagine the impact on the U.S. Dollar (NYSE:UUP) and U.S. Treasuries (NYSE:TLT) not to mention gold (NYSE:GLD), silver (NYSE:SLV) and other commodities (NYSE:DBC). For more analysis on our support levels and ranges for gold and silver, consider a free 14-day trial to Wall St. Cheat Sheet’s acclaimed Gold & Silver Investment Newsletter.

With summer recesses in Congress, only two weeks exist on the calendar between now and August 2nd when both Houses are in town and so this is likely going to turn into a high stakes game of chicken as the clock ticks towards August 2nd.

And, finally, the Greek Tragedy continued with the government surviving a no confidence vote and now facing important votes in Parliament next week regarding implementation of their austerity programs in the face of widespread popular discontent and demonstrations in the streets.  That will be an interesting farce to watch, for sure.

Economic reports last week were mostly dismal:

* May Existing Home Sales Down to 4.8 Million from 5 million previously

* Jobless claims up to 429,000 from 420,000 previously

* May New Home Sales Down to 319,000 from 326,000 previously

* 1Q GDP up to 1.9% from 1.8%

* May Durable Goods +1.9% from -2.7%

* Moody’s puts dozen Italian banks on review

* Oracle earnings disappoints

* Spain 10 Year note yield highest in 11 years, since May, 2000,

What It All Means for Stock Market and ETF Investors

What it all means for us as stock market and ETF investors is that we remain in perilous times with significant downside risk ahead as we head
towards the 4th of July holiday.

Big issues in Greece and at home could have global implications while the economy continues to sputter.  Furthermore, any cuts in government spending or increases in taxes that come out of the deficit ceiling debate will undoubtedly act as a further drag on the U.S. economy which is already perilously close to slipping back into contraction.

With the Federal Reserve’s removal of the punchbowl of easy money this week, it’s hard to see much upside propellant for global and domestic equity markets.

The Business and Financial News Week Ahead

The big news to watch for this week will be the votes in the Grecian Parliament on Wednesday and Thursday, the outcome of the stalemate between the White House and Congress over deficit reduction and several significant economic reports sprinkled throughout the week for housing, consumer confidence, unemployment and manufacturing.

Monday: May Personal Income, May Consumer Spending (NYSE:XRT)

Tuesday: April Case/Shiller Housing Report (NYSE:IYR), June Consumer Confidence

Wednesday: May Pending Home Sales

Thursday: Initial Unemployment Claims, Continuing Claims

Friday: June Consumer Sentiment, June ISM, May Construction Spending, June Motor Vehicle Sales (NYSE:F)(NYSE:GM)(NYSE:TM)

ETF Spotlight

Leaders: (NYSE:ITB) Home Construction (NYSE:IYM) Basic Materials

Laggards: (NYSE:EWD) Sweden (NYSE:EWI) Italy

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

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