Are ETF Trendline Changes on the Way?

The week before last, the market was poised to go 8 for 8; that is, stocks hadn’t lost ground since February of ‘09.

Then came the late October spook-fest. The S&P 500 SPDR Trust (SPY) lost -4.2% last week alone, while the the PowerShares Nasdaq 100 (QQQQ) shed -5.0%.

Not since July have these market barometers finished a week below their respective 50-day moving averages. Now take a look at where things stand.

Might the fact that stock assets dropped below short-term trendlines be a reason to fret? Perhaps. But keep in mind, we experienced a June-July correction of 7%, only to see buyers return in force.

There are some key differences, however. In the mid-June through-early-July pullback, the U.S. dollar was actually falling in value and assisting the worldwide carry trade. The pullback was primarily rooted in earnings uncertainty. Yet once bottom-line profitability for most corporations began exceeding expectations and as the dollar continued its descent, asset prices moved markedly higher.

Here in late October, though, earnings uncertainty wasn’t all that “uncertain.” Whispers of blow-out results were commonplace. Even top-line revenue numbers were able to confirm earlier guidance. Nope, this time it was the dollar’s sudden strength that sent the market spiraling lower.

Consider the PowerShares Dollar Bullish Fund (UUP). For the first time since April, the U.S. dollar is actually threatening to climb above a 50-day, short-term trendline.

And as if that weren’t the only “threat,” the CBOE Volatility Index (^VIX) is perilously close to climbing above a long-term trendline… the 200-day moving average. And that hasn’t happened since March.

A near-term uptrend for the U.S. dollar? A long-term uptrend for volatility? These are not desirable circumstances for the “present tense.”

That said, investors should keep their wits about them. The likelihood of intermediate-term strength in the U.S. dollar seems far-fetched… when both the Fed and the U.S. government are working pretty hard to keep the greenback weak. What’s more, money managers everywhere are still looking for entry points to put money to work for clients who want ”back in.” And last but not least, according to Stock Trader’s Almanac, November 1 begins the best 3-month period for historical growth in the stock market.

Time will tell. (That… and the dollar!)

Full Disclosure: Gary Gordon, MS, CFP is the president of Pacific Park Financial, Inc., a Registered Investment Adviser with the SEC. The company may hold positions in the ETFs, mutual funds and/or index funds mentioned above.