by John Nyaradi
U.S. stocks and ETFs started 2013 with a bang as the Dow Jones Industrial Average (NYSEARCA:DIA) gained 331 points from its close on December 31st to Friday, January 4th. The S&P 500 (NYSEARCA:SPY) jumped 2.8% over the same period while the Nasdaq 100 (NASDAQ:QQQ) climbed 2.4%.
The catalyst, of course, was the partial resolution to the fiscal cliff debate and the positive mood was also bolstered by relatively good news on the economic front.
On a technical basis, major U.S. indexes like the S&P 500 stand at significant resistance levels, and fundamental factors like earnings season, the upcoming debt ceiling debate and future policy by the Federal Reserve now all come into sharper focus.
The next few days and weeks will likely be volatile as stocks and ETFs stand at a critical crossroads.
On My ETF Radar
chart courtesy of StockCharts.com
The chart of the S&P 500 above shows how the major index has returned to bullish status with a double top breakout, a "buy" signal, generated on January 2nd. However, the recent rally stopped exactly at significant resistance levels marked by the horizontal red lines and a breakout above these levels is required to confirm the sustainability of the current advance. Failure here would form a "quadruple top" which would be particularly bearish from a technical point of view. Recent stock and ETF action is bullish, but since no one has a crystal ball, we will have to wait and see if the uptrend can continue or not with a breakout above the 1470 level on the S&P 500 Index.
ETF News You Can Really Use
Last week was extremely bullish for stocks and ETFs, with the S&P 500 reaching a closing high not seen since 2007 on a relief rally generated by the fiscal cliff settlement.
Big news last week included:
11th Hour Fiscal Cliff Deal: Congress acted late in the game to stave off the "fiscal cliff" with a combination of tax increases and a new deadline for spending cuts, effectively establishing a new fiscal cliff deadline in late February. Various estimates of the current deal put the drag on GDP at 1-1.5% with more to come from the likely spending cuts.
Positive Economic Reports: Weekly jobless claims were about as expected and for December, the government reported an employment increase of 155,000 for December and an unemployment rate of 7.8%. The Institute for Supply Management service sector index rose to 56.1 and the ISM purchasing managers index climbed back above 50 to reach 50.7 in December, up from 49.5 in November. Readings above 50 indicate economic expansion.
On the negative side, the Federal Reserve minutes indicated that the Fed could be "out of bullets" and that further easing could become more expensive and less effective.
The Week Ahead For Stocks and ETFs
Next week brings a combination of economic reports and the start of the all important Q4 earnings season.
Notable items include the NFIB Small Business Survey and Consumer Credit on Tuesday, Weekly Jobless Claims, November Wholesale Inventories on Thursday and Trade Deficit, Import Prices and Federal Budget on Friday.
Earnings season kicks off on Tuesday after the close with Alcoa (NYSE:AA) and a major report from Wells Fargo (NYSE:WFC) on Friday. Earnings are widely being estimated as disappointing and so this will be an important earnings season as the recent rally will be looking for support from fundamentals. Of course, many companies have cut expectations and forecasts which could make this earnings season appear rosier than it otherwise would. More than 70% of companies in the S&P 500 have issued below consensus earnings estimates, close to a record high according to FactSet.com.
Congress and the White House will also return to the forefront as the debate over increasing the debt ceiling gets underway and the new fiscal cliff deadline approaches. Republicans say they want one dollar in spending cuts for each dollar the debt ceiling is raised while the White House says it's not negotiating over the debt ceiling.
Bottom line: U.S. stocks and ETFs now face a moment of truth after the recent powerful rally. Technical resistance and fundamental headwinds persist along with ongoing political uncertainty. The last debt ceiling debate ended in stalemate in August, 2011, and so created the fiscal cliff after a decline of nearly 17% during July/August, 2011. The current debate over lifting the debt ceiling will play out in tandem with "Fiscal Cliff: The Sequel," and so expect more volatility and challenges just ahead.
Disclosure: Wall Street Sector Selector actively trades a wide range of exchange traded funds and positions can change at any time.