By John Nyaradi
U.S. stocks and ETFs had a rough week punctuated by sharp volatility as concerns over the fiscal cliff continued rocking world markets and tensions escalated in the Middle East. As trading thins for the Thanksgiving Week and headlines continue flowing from Israel and the Gaza Strip, expect more volatility ahead.
On My ETF Radar
In the point and figure chart below of the S&P 500 (SPY) we can see the clear outlines of a bear market, at least over the short term.
The breakout pattern went to a "sell" signal on October 23rd for a short-term "sell" signal and, more recently, the chart broke below its blue, bullish support line which indicates intermediate term weakness and the likelihood of lower prices ahead. These blue and red lines are infrequently penetrated and tend to act like walls and forecast major changes in trend, with the current shift being to the negative.
Support levels are at the green lines near 1320 and 1260, 3-7% below today's prices. Long-term bulls could view the current situation as a buying opportunity, "buy the dip," while bears view this as the beginning of a new downtrend within a longer term ongoing bear market.
On a short-term basis, markets are reaching oversold levels and so a short-term bounce could be expected, particularly with a resolution to the never ending saga of the fiscal cliff.
ETF News You Can Really Use
Major U.S. stock indexes and ETFs climbed on Friday as political leaders expressed optimism after their first round of talks regarding the fiscal cliff. Still, for the week, major U.S. indexes were down with the Dow Jones Industrial Average (DIA) dropping 1.8%, the SPY falling 1.5% and the Nasdaq (QQQ) slipping 1.8%. The Russell 2000 (IWM) fell 2.4% for the week.
This was the second straight weekly decline for the S&P 500, the fourth straight weekly decline for the Dow Jones Industrial Average and the sixth straight weekly decline for the Nasdaq.
Nevertheless, VIX, the CBOE S&P 500 Volatility Index, also known as the "fear indicator," fell as complacency settled in over the markets. However, oil and energy ETFs climbed for the week on concern over the escalating conflict between Israel and Hamas in the Gaza Strip
Gold and precious metals fell for the week as the precious metal ETFs continue tracking with the S&P 500. European ETFs mostly fell for the week with the notable exception of Spain (EWP).
Economic reports were mixed for the week as small business mood improved and the October producer price index declined but those bright spots were offset by a slew of negative economic reports, largely generated in the aftermath of Hurricane Sandy.
Weekly unemployment claims jumped to 439,000, up from 361,000 and October Retail Sales declined 0.3% from last month's +1.3%.
The November Philadelphia Fed report plunged to -10.7 from last month's +5.7 but the New York Empire Index fell -5.2 compared to last month's -6.2
Overseas, Europe reentered recession with a GDP decline of -0.1%, to make the double dip official, and Japan's Q3 GDP fell into contraction mode as the country's Parliament was dissolved for new elections.
The Holiday Week Ahead For Stocks and ETFs
With light trading volumes and heavy news flow expected from the Middle East, investors can expect the potential for more volatility this coming week.
The fiscal cliff will stay in the headlines, even as Congress goes on Thanksgiving vacation, as Congressional leaders pledge to keep talking over the holiday with the goal of some sort of settlement before Christmas.
The Middle East will likely stay at the top of the headlines as Israel masses troops along the Gaza Strip and neighboring countries scramble to find a way to deescalate the violence.
Economic reports for the week include existing home sales and the homebuilders index on Monday, housing starts on Tuesday and weekly jobless claims, University of Michigan confidence and leading indicators on Wednesday. Dr. Bernanke speaks on Tuesday and the widely hyped Christmas shopping season kicks off on Black Friday after the Thanksgiving holiday.
Overseas, the European finance ministers are scheduled to meet on Tuesday to decide on the next tranche of monetary aid to Greece.
Bottom line: Headline news will continue to rock and roil global stocks and ETFs and moves, up or down, will likely be amplified by thin trading volumes. Europe, the Middle East and fiscal cliff deserve special attention while technical indicators point to continued weakness ahead.
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Disclosure: Wall Street Sector Selector actively trades a wide range of exchange traded funds and positions can change at any time.