Index ETFs Rally As Sequester Nears

Includes: DIA, IWM, QQQ, SPY
by: Wall Street Sector Selector

by John Nyaradi

Index ETFs have temporarily wiped out Monday's wipe out, as the SPDR S&P 500 ETF (NYSEARCA:SPY) rose 1.26%, the SPDR Dow Jones Industrial Average ETF (NYSEARCA:DIA) rose 1.31%, the PowerShares QQQ Trust ETF (NASDAQ:QQQ) rose 1.02%, and the iShares Russell 2000 Index ETF (NYSEARCA:IWM) rose 1.05%. The DJIA was Wednesday's big winner, as the index registered a new 5 year high since October 2007.

Despite the looming sequester deadline for the U.S. Federal Government quickly approaching this Friday, Index ETFs and stocks had a powerful day today, likely due to (surprise, surprise) Dr. Ben stating that QE3 would continue even with the U.S. economy improving. Some analysts suggested that the positive Pending Home Sales report released this morning helped in yesterday's rally, which it most certainly did, but let's be realistic: Dr. Ben spoke, investors welled up with tears of joy, and markets went berserk.

Considering that the Federal Government is about to take $85 billion across-the-board spending cuts this Friday, which some analysts have estimated could cost the U.S. economy up to 900,000 jobs, markets should be diving deep into the red. With our fragile economy, potentially 900,000 fewer jobs after this Friday, and more importantly (and more scary), the Congressional impasse over this issue in the past week, all investors should be floored to the floor. But, of course, Dr. Ben and his cavalry rode in and investors swooned. Anything new or surprising in this picture?

And about the Pending Home Sales report yesterday, the National Association of Realtors reported that its Pending Home Sales Index rose 4.5% in January, signaling continuing improvements in the housing market. Good news, no doubt, but not enough firepower, in my opinion, to fuel a 1% rise in Index ETFs. We can thank Dr. Ben for pouring straight gasoline on the fire today.

Bottom line: Investors and markets should be (in my humble opinion) going straight to the center of the earth, considering the sequestration deadline approaching this Friday. However, Dr. Ben and his cavalry again have proven that at least for today, they can save the day. How many more times Dr. Ben can save the day is a big unknown. Either way, I would say brace for Friday, just in case.

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