by John Nyaradi
Week Two of 2012 was strong but Week Three and beyond will depend upon action and news from Europe.
The bulls were largely in charge last week, with continued positive economic reports and corporate earnings reports in America. However, Friday the 13th was truly unlucky for Europe as S&P went on another “credit downgrade rampage”, which reaked havoc across the pond. Major European ETFs took losses in the neighborhood of 2% as the news-- while not surprising-- was very poorly received.
On My ETF Radar
Click to enlarge
Chart courtesy of www.stockcharts.com
In the chart above, we can see how the S&P 500 (NYSEARCA:SPY) (NYSEARCA:IVV) is in a technically bullish configuration with a “triple top breakout” established on January 3, 2012, with an upside profit target of 1460. The index is well above its bullish support line, which is the blue line at approximately 1190 on the index, below which would be bear market territory in point and figure charting.
So all is well, however, the S&P 500 index needs to break above the heavy resistance line at 1290 in order for this rally to continue. It has been hovering at this level for the last four trading days and needs a convincing and sustained breakout to establish this level as new support and set the groundwork for moves higher.
The Economic View From 35,000 Feet
The Bulls were in charge on Monday through Thursday of the New Year’s week two until ratings agency Standard & Poor’s downgraded a slew of European nations, which spooked stocks and European ETFs to sell off an average 2%. France (NYSEARCA:EWQ) and Austria received the harshest downgrade as they lost their coveted “AAA” status, while Italy (NYSEARCA:EWI) was reduced to a “BBB+” and Spain was slammed down to AA. Perhaps the country most hurt was Portugal, which received the infamous “BB.” As mentioned earlier last week, S&P placed nearly 15 countries on “credit watch” in the fourth quarter of last year; I feel it was only a matter of time before the coveted ratings would be stripped and now that time has come.
There is a sense of irony, however, in the fact that S&P’s downgrades, although intended to inform investors of a nation’s credit worthiness, do not stop investors from buying government bonds with spiked interest rates. Quite the contrary, as we have witnessed record setting low yields for U.S. Treasury Bonds (NSYEARCA:TLT) after our country lost our “AAA” status, and Italy has somehow managed to keep their yields right at or below the 7% mark. However, the downgrades still got the attention of German Chancellor Merkel and French President Sarkozy, who both made statements over the weekend downplaying the importance of the downgrades, while at the same time promising to step up their efforts to solve this ongoing, annoying problem.
The bulls got mostly good economic news at home as the Fed Beige Book report indicated that the recovery was moving in a positive direction along with a positive home builders report. The bad news was the increase in jobless claims for the first week of January; we will know more in the coming months if this negative news was a due to end of year layoffs by corporations or if, indeed, the economy is shedding jobs again. Earnings season started mixed with JP Morgan’s (NYSE:JPM) 23% drop in Q4 earnings while Alcoa (NYSE:AA) showed a 2.9% improvement. This week earnings season goes into full swing, and we also get a string of major economic reports so investors will have plenty to consider in Week T, so the vast difference in positive and negative numbers for large U.S. corporations can only indicate that the economy is improving ever so slightly, however still lurks on the ledge of total collapse.
Bottom Line: Europe still holds the key to future success in our world today. It is likely that somehow they will pull out another “13th hour”solution to avoid complete global catastrophe, however, one must wonder how many times central banks and governments can pull it together “just one more time.” Technical indicators and seasonal trends still point to a likely “bulls in charge” environment, however, we remain cautious as all eyes focus on Europe.
Disclosure: Wall Street Sector Selector actively trades a wide range of exchange traded funds and positions can change at any time.