Will U.S. Stock Market Bulls Lead All Global Financial Markets Upward?

U.S. Index ETFs And Stocks Move Higher, Defy Gravity

U.S. stock indexes and index ETFs put in a strong showing on Friday and for the week, moving higher in spite of mixed economic reports and overbought technical indicators

On My ETF Radar

s&p 500, etfs, spy, nysearca:spy

In the chart of the S&P 500 (NYSEARCA:SPY) above, we can see how RSI has returned to overbought levels above 70 which is where it has been for the last two weeks.  Momentum is slowing as represented by MACD, but the trend remains strongly positive on a near term basis.

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Economic reports were mixed last week and we’re coming into the worst month of the year during post Presidential election years.  Seasonality, along with the upcoming “Fiscal Cliff 2″ debate, will likely put more headwind into the  U.S. financial scene.  Furthermore, Q4 GDP came in negative last week and if this estimate is confirmed, will cast an even longer shadow over the economic and financial landscape going forward….

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Last week was the fifth straight week in the green for U.S. stock indexes and ETFs and the Dow Jones Industrial Average (NYSEARCA:DIA) closed above 14,000 for the first time since October, 2007.  The Dow Jones Industrial Average’s (NYSEARCA:DIA) all time closing high is 14,164, also set in October, 2007, just 1.1% from Friday’s closing level.

Economic news indicated mostly positive data with January Non Farm Payrolls coming in at 157,000 new jobs but missing expectations even as November’s and December’s reports were revised sharply upward.  January ISM beat expectations with a print of 53.1, solidly in expansion territory, and the Markit U.S. PMI report also came in better than expected with a 55.8 reading, indicating stronger economic growth.  Finally, the University of Michigan consumer sentiment index posted a better than expected 73.8

Overall unemployment for January rose to 7.9%.

For the week, the S&P 500 (NYSEARCA:SPY) gained 0.7%, the Dow Jones Industrial Average (NYSEARCA:DIA) rose 1.1% and the Nasdaq Composite (NYSEARCA:QQQ) climbed 0.9%.

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VIX, the CBOE S&P 500 Volatility Index, also known as the “fear index,” fell sharply on Friday with a 9.66% drop to close at 12.90, far below its historical average of 20, as the index lost a significant portion of its recent rally.  VIX ETFs also were significant movers on Friday:

iPath S&P 500 Short Term VIX Futures: (NYSEARCA:VXX) -5.14%

VelocityShares Daily 2X VIX Short Term ETN (NYSEARCA:TVIX) -8.24%

Earnings season is more than half over and earnings reports have beaten expectations with almost 3/4 of reporting companies issuing better than expected reports.

Year to date, the S&P 500 (NYSEARCA:SPY) has gained 6.1% while the Dow Jones Industrial Average (NYSEARCA:DIA) has climbed 6.9%. On an annual basis, these kinds of gains would equate to 70-80% for the year, and it’s fairly certain that the final tally for 2013 won’t be at those lofty levels.  This tells us, as discussed above, that major U.S. index ETFs and stocks are very overbought and considerably ahead of themselves year to date.  Nevertheless, bullish sentiment and buying can continue for sometime with markets remaining overbought until fundamentals once again take hold…

On a fundamental basis, additional headwinds exist in the form of the negative Q4 GDP report issued last Wednesday.  The estimate indicated a 0.1% contraction, largely due to cuts in defense spending, Hurricane Sandy and declining state and local spending.  These factors could become more extreme as Congress and the White House take up the “Fiscal Cliff Part 2″ debate this month which will focus on cuts in government spending designed to head off more serious “sequestration” cuts in military and domestic spending scheduled for March 1.

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Whatever the outcome and timing of that debate, it seems clear that government spending is going to be reduced which will add more drag to the U.S. economy.  Of course, the official definition of recession is two consecutive quarters of negative GDP and so analysts and investors will be keeping a close eye on the possibility of a double dip recession for the United States.

Next week brings economic reports in the form of factory orders on Monday, Non Manufacturing ISM on Tuesday, weekly jobless claims and productivity on Thursday and wholesale inventories on Friday. Earnings reports will focus on the consumer sector with Clorox, Yum (NYSE:YUM) and Coca Cola (NYSE:KO) scheduled to report.

Bottom line: After a heady start to 2013, major index ETFs and stock indexes approach all time highs, long term resistance, overbought levels and fundamental resistance.  While the economic data continues to improve, new challenges lie ahead.

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