Stock Market and ETFs Claw Back as Strong Earnings Lift Spirits

Major U.S. stock indexes and ETFs climbed back to the ceiling last week but failed to break higher.

Shrugging off weak economic reports and focusing on overall strong U.S earnings reports, U.S. stock indexes and ETFs climbed back to and stopped at recent resistance levels.

On My Wall Street Radar


In the chart of the S&P 500 (NYSEARCA:SPY) above we can see how this major index has climbed back into serious resistance levels.  Relative strength (RSI) is above 50 and climbing, which is bullish, and short term momentum as represented by MACD has recently generated a “buy” signal and all of this comes within the context of an ongoing uptrend with the S&P 500 (NYSEARCA:SPY) above both its 50 and 200 day moving averages.

However, we now find ourselves in the most frustrating of all conditions, a long, sideways channel or trading range, this one being between resistance at 1400-1420 and support at 1360.  A break above 1400-1420 would indicate the end of the channel and the resumption of  the current trend upwards while a reversal below 1360 would indicate a correction could be underway.

The Economic View From 35,000 Feet

For the week, the major indexes were positive with the Dow Jones Industrial Average (NYSEARCA:DIA) gaining 1.5%, the Nasdaq 100 (NYSEARCA:QQQ) adding 2.3% and the Russell 2000 (NYSEARCA:IWM) climbing 2.7%.

The gains came in the face of some rather dismal economic reports, with just a ray or two of sunshine, while earnings reports in the United States continued to support bullish optimism.

On the positive side of the economic ledger, we saw pending home sales for March vastly beat expectations by climbing 4.1% and new home sales improving, as well.  The University of Michigan Confidence Index came in at 76.4 compared to 75.7 previously, and overseas, Spain and Italy stayed afloat with successful bond auctions.

On the downside, the biggest shocker was the GDP estimate on Friday which indicated that Q1 GDP expanded by a mediocre 2.2% compared to 2.7% expected and the previously reported 3.0%.  Final sales were dismal and durable goods orders were weak, while weekly unemployment claims clung stubbornly above 380,000 missing estimates for the week.

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Overseas the big news came from Britain where the country entered a double dip recession, joining Spain, Italy and Netherlands whose government fell over national dissatisfaction with planned austerity programs.  The French election puts another twist in Euro Zone politics while German and Italian consumer and business confidence fell.

On the upside for the week were U.S. earnings reports, particularly in the tech sector, with Amazon and Apple blazing higher as U.S. companies continued to find ways to make money in a slowing global environment.  However, the GDP report points to some significant structural weaknesses as much of it came from inventory buildup and not from final sales.  In either case, this type of action cannot continue for the long term which can only be bad news for spending and earnings somewhere down the road.

Finally, the FOMC says they’re going to keep interest rates near zero for as far as the eye can see because they still see significant downside risks to the economy and unemployment isn’t improving as rapidly as they’d like.  Dr. Bernanke’s press conference was interesting, as always, as market participants are counting on the Fed to keep things going with more easing as Dr. Bernanke promises he’s ready, willing and able to do.

Next week brings earnings reports from the likes of Office Depot, Pfizer (NYSE:PFE), MasterCard (NYSE:MA), Clorox and UBS but the big news will be in economic reports which come hot and heavy all week.  Monday brings income, spending and Chicago PMI.  Tuesday sees the widely watched ISM report, construction spending and car sales, Wednesday finds ADP Employment and factory orders.  Thursday brings the weekly jobs report and ISM non manufacturing, and Friday brings the grandaddy of all economic reports, the monthly Non Farm Payrolls and Unemployment Reports.  It’s going to be a big week.

Bottom line:  Having made three tries to scale new highs, the major U.S. indexes appear ready to give it another try.  We remain in “bear alert” mode from April 16th, and this week’s action will be significant as we move into the seasonally weak period of May through October.

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