Stock Indexes Post Losing June, Positive Second Quarter

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

by John Nyaradi

Major U.S. stock indexes declined on Friday to finish June on a down note. For the month, the Dow Jones Industrial Average (NYSEARCA:DIA) declined 1.4%, the S&P 500 (NYSEARCA:SPY) slipped 1.5% for the month and the Nasdaq (NYSEARCA:QQQ) finished June off 1.5%.

For the second quarter, the major stock indexes posted gains with the Dow Jones Industrial Average gaining 2.3%, the S&P 500 adding 2.4% and the Nasdaq posting a 4.2% advance.

On My Stock Market Radar

As the first half draws to a close, technical indicators point to choppy waters ahead for U.S. stock indexes.

Click to enlarge

chart courtesy of StockCharts.com

In the chart of the S&P 500 above, we see how the index is still on a point and figure "sell" signal with a downside price objective of 1480. However, the most recent entry is a column of "Xs" which indicates that demand came back in control of the index on June 27th as it posted a "low pole reversal" which is tech speak for a rebound off oversold lows.

Support lies at 1570, resistance at 1640. Long-term support and the line between bull and bear market lies at 1520, the blue bullish support line, some 7.5% below current levels.

Stock Market News You Can Really Use

As the doldrums of summer set in with the upcoming holiday shortened week, we see major U.S. stock indexes continuing to be buffeted by "Fed Speak" and the possible future of quantitative easing. Upcoming factors will be a heavy stream of data this week around the 4th of July holiday, events in China, the fate of the bond market and the upcoming earnings season.

The Federal Reserve continues to insert volatility into the markets as Dr. Bernanke started the discussion with his recent suggestion that tapering of QE3 could begin sometime over the next few meetings. A band of Fed Presidents worked hard last week to calm markets, while Fed Governor Jeremy Stein floated the hypothetical possibility of an announcement at the September meeting. All in all, the Fed seems conflicted about how it should proceed, and this is being reflected in market volatility.

Overseas, the Shanghai Composite was down 18% from its February high as the world's second largest economy struggles with slowing growth and an ongoing liquidity crisis, and the future of demand in China has adversely impacted commodity prices around the world as global demand could wane.

Gold (NYSEARCA:GLD) made the biggest headlines, with a stunning drop of 21% since mid-April and "Dr. Copper" has fallen 12% in the same period on fears of deflation and slowing global economic demand. In Europe, Germany's DAX (NYSEARCA:EWG) is down 6.8% from its May high and Spain's Ibex Index (NYSEARCA:EWP) is down 11% from its January high as Europe faces an ongoing, extended recession. The broader Euro Stoxx 50 (NYSEARCA:EFA) is down 8.3% from its May high, and so it's easy to see a deceleration in stock market prices around the world.

The bond market entered an extremely volatile period in May, with long-term bond prices (NYSEARCA:TLT) dropping nearly 11% since early May in the face of the possibility of rising interest rates.

This development has already significantly impacted mortgage rates which have spiked and which, in turn, will slow the all important housing market, the brightest spot in an otherwise weak economic recovery. Rising interest rates could be a factor across the whole spectrum of economic activity as this action affects housing costs, big ticket purchases, corporate profits and the government's ability to pay and refinance its debt. Bond funds have experienced record weekly outflows in the face of recent developments.

Earnings season in the United States will officially get underway with Alcoa (NYSE:AA) reporting on July 8th. Negative earnings guidance is the order of the day, with more than 80% of S&P 500 companies putting out negative guidance. Negative guidance has been a predictable tactic that then allows the companies to "beat" estimates when their results are released.

Last week's economic reports saw the Case/Shiller Home Price Index jump 12% year over year, durable goods orders rise 3.6%, and new home sales jump to 476,000 in May compared to 454,000 in April. Weekly jobless claims declined, pending home sales rose and consumer spending climbed 0.3% compared to last month's -0.3%.

Negative news came in the form of Chicago PMI, which tumbled to 51.6 in June, close to the all important 50, which separates expansion from contraction. The final estimate for Q1 GDP came in at 1.8%, below the previous 2.4% estimate and perilously close to flat line/negative growth territory.

The upcoming holiday shortened week will see plenty of economic action with central bank meetings around the world, important domestic economic reports and Friday's closely watched Non Farm Payroll and Unemployment Reports. Overseas, Japan will report its Tankan business survey on Monday and China reports PMI on Monday, as well, which will be closely watched to see if growth continues to slow in the world's second largest economy. Central bankers will be busy with interest rate meetings in Australia, Sweden, England and the most important, the European Central Bank on Thursday.

In U.S. economic reports, we'll see a steady stream of important data:

Monday: June Markit PMI, May Construction Spending, June ISM

Tuesday: May Factory Orders

Wednesday: June ADP Employment, weekly jobless claims, June ISM Non Manufacturing

Friday: June Non Farm Payrolls, June Unemployment

Bottom line: World financial markets and U.S. stock indexes will likely continue to be buffeted by "Fed Speak" and volatility as we go deeper into the lazy, hazy, crazy days of summer.

Disclosure: Wall Street Sector Selector actively trades a wide range of exchange traded funds and positions can change at any time.