By John Nyaradi
After a tough week of red ink. U.S. ETFs and stocks face the fiscal cliff, a bear market in Apple Computer (NASDAQ:AAPL), Europe, a divided government and significant technical weakness. The volatile week past led to a modest recovery for stocks and ETFs on Friday, heading into the holiday weekend, as investors digested the post-election landscape.
On My ETF Radar
In the chart of the S&P 500 below we can get a clear picture of the outcome of recent stock market action.
The S&P 500 is on a sell signal and has reached its downside price objective of 1380 which is now likely to be revised lower. Major support levels are at the green horizontal lines near 1260, 1320 and 1360. A break below 1260 would clear a path to 1160 on the S&P 500.
But the big news this week was the bearish breakdown of the index below the blue bullish support line. This type of action doesn't happen very often and is similar to the break of the 200 day moving average in conventional charting. These blue and red lines tend to act as walls, and once penetrated, open the door to further moves which, in the current situation, would be down.
chart courtesy of StockCharts.com
The Dow Jones Industrial Average ETF (NYSEARCA:DIA), S&P 500 ETF (NYSEARCA:SPY) Nasdaq 100 ETF (NASDAQ:QQQ) and Russell 2000 ETF (NYSEARCA:IWM) all closed below their respective 200 day moving averages this week and so the technical picture is bleak across the board.
Another red flag for U.S. markets is the bear market in Apple Computer and its effect on the technology sector and the Nasdaq Composite. Apple is the world's largest company and has been in a nosedive since reaching a closing high of $702 on September 19th. Since then it has fallen to close at $547 on Friday, a drop of 22% and placing the stock well below its 50 and 200 day moving averages and possibly creating an "Eiffel Tower" pattern.
ETF News You Can Really Use
Now that the election is over, investors are coming to grips with the fact that the same players who brought us the fiscal cliff problems are gathering at the White House next Friday in round two of attempting to resolve their differences. We all know markets don't like uncertainty and the only thing that seems certain is that the two sides are likely to disagree, at least at the outset.
The last time they went through this drill in the summer of 2011, the S&P 500 fell nearly 17% between July 22nd and August 19th and so it's no wonder that markets are getting nervous and wondering if this will be "deja vu all over again", in Yogi Berra's immortal words.
But the fiscal cliff isn't our only problem as Europe continues percolating on the back burner with growing economic weakness in Germany and a delay of the next round of European bailout money for Greece.
Beyond that, QE3 appears to have lost its "umph" as the S&P 500 saw its recent peak the day after it was announced and now has slipped from its recent high of 1465 on September 14th to Friday's close at 1379, a drop of 5.9% and the lowest level for the S&P 500 since August.
So now it's put up or shut up time for Congress and the White House as they start talking Friday and the clock ticks towards December 31st when the combined $600 billion hit of spending and tax cuts slices at the American economy. The Congressional Budget Office estimates that the economy would slip into a mild recession of -0.5% and that unemployment would climb back north of 9%. And let's not forget Hurricane Sandy or the weakest earnings season in years, both of which now seem dim memories as events continue to rapidly unfold.
But there was some good news this week, as the seemingly never ending election season finally drew to a close and University of Michigan confidence rose to 84.9, its highest level since summer, 2007.
Next week comes the renewed discussion of the fiscal cliff issues and a spate of important economic news. On Tuesday we get retail sales, producer prices and the most recent FOMC meeting minutes. Thursday brings the weekly jobs report, consumer price index, Empire State Manufacturing Index and the widely watched Philadelphia Fed report, followed by Industrial Production on Friday as the fiscal cliff conclave gets underway at the White House.
Bottom line: Expect more volatility and possibly lower prices ahead as these significant events unfold. It's unlikely that U.S. political leaders will let the economy go over the cliff, but the market is saying that it's possible and that it's not happy with current directions. Apple is the 900 pound gorilla in the room and its future will be felt in major U.S. indexes and ETF action. However, Apple is still up 33% year to date while the S&P 500 is up nearly 8% with just days left in the year and so bulls can take cheer from this kind of exciting performance thus far.
Disclosure: Wall Street Sector Selector actively trades a wide range of exchange traded funds and positions can change at any time.
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