Can the Markets Keep Braving These Headwinds?

The U.S. stock market indexes remain mired below recent highs as fundamental and technical headwinds grow.

The U.S. stock market and its major indexes had a good last week. However, macro economic data continued to be glum, while earnings reports beat lowered expectations, and technical resistance grew.

For the week, the S&P 500 (NYSEARCA:SPY) gained 1.7 percent, the Nasdaq Composite (NYSEARCA:QQQ) climbed 2.3 percent, and the Dow Jones Industrial Average (NYSEARCA:DIA) added 1 percent. All three major stock market indexes and their related ETFs remain below their recently recorded all-time highs.

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On My ETF Radar

In the chart of the S&P 500 below, we can see how the stock market index is near overbought conditions — with the RSI at 66.79 and momentum declining as MACD turns south. This sets up a divergence between momentum and the recent rally back to significant resistance levels, and typically, these divergences are resolved in one direction or the other.

With major resistance at the 1,600 level — just above the current price — the most likely resolution is down as the S&P 500 makes another stab at its all-time high of 1,593, set on April 11. However, a sustained break above that level would likely trigger a further move higher as more money jumps aboard what will then look like an unstoppable train.

All three major stock market indexes are below their recent all-time highs and find stiff resistance just above. Support for the S&P 500 is found first at 1,500, then at the 50-day moving average of 1,439, and then at 1,400, where major support lies. Fibonacci retracement levels find support between 1,530 and 1,550, so the likely parameters for an initial correction fall between 5-12 percent.

Chart courtesy of StockCharts.com

ETF News You Can Really Use

Macro economic news remained dismal last week, with 1Q GDP growing 2.5 percent and missing expectations, while consumer sentiment fell on Friday with  April’s reading of 76.4 being the lowest for the year so far and down from March’s 78.6.

March durable goods fell more than expected, with a decline of 5.7 percent compared to last month’s +4.3 percent and expectations of -3.2 percent. Markit Flash PMI for April declined to 52, just above the 50 line that separates expansion from contraction, and down from last month’s 54.6.

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Earnings reports have mostly met or beaten drastically reduced expectations. However, current trends indicate that overall earnings growth for the quarter might post the first decline year-over-year since 2009. In good news, weekly new unemployment claims declined, and March new home sales were 417,000, missing expectations, but up from the previous month’s 411,000.

Overseas, Purchasing Manager’s Indexes were also dismal, with China barely holding above 50 and Germany and France leading Europe downward with readings below 50.

Apple (NASDAQ:AAPL) continued making news with a tepid earnings report and downward guidance ahead. Warning signals come from declining profit margins, slowing revenue, no new products until autumn, and increased pressure from Samsung (SSNLF.PK), which is taking market share in the hotly contested smartphone market.

New earnings reports will be in full swing this week, with high profile announcements from Facebook (NASDAQ:FB), Yelp (NYSE:YELP), Visa (NYSE:V), General Motors (NYSE:GM), Kraft Foods (NASDAQ:KRFT), and AIG (NYSE:AIG), among others.

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The week also brings a heavy flow of earnings and economic data. On the economic front, Monday brings personal income, spending, and new home sales, while Tuesday features Case/Shiller Home Price Index, consumer confidence, and Chicago PMI. The headliners on Wednesday are the FOMC meeting announcement, April Institute of Supply Management, construction spending, and ADP private employment. Thursday brings weekly jobless claims, and Friday is the grand finale for the week with April Non-Farm Payrolls and Unemployment Rate, service sector ISM, and factory orders.

Bottom line: The major U.S. stock market indexes will try to make new highs in the face of technical and fundamental headwinds. Central bank support and intent will continue to play a large role in this week’s price action, along with the macro economic data picture culminating in Friday’s monthly payrolls report.

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

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