U.S. stock market remains stuck near all time highs as Congress and the White House squabble over March 1st spending cuts.
U.S. stock market and its major indexes drifted sideways for yet
another week as economic reports were mixed and the clock ticks towards
the sequestration deadline of March 1st. Stock market participants
remain complacent as VIX, the CBOE Volatility Index, remains near
historic lows and major indexes remain overbought. The next two weeks
are likely to provide a catalyst, one way or other, for future
On My ETF Radar
As described, the stock market remains overbought and momentum has
slowed dramatically after the recent run up. Volume remains low and
daily moves are extremely tight, suggesting a lack of commitment to push
the market higher.
Furthermore, stock market breadth is beginning to weaken as the
percent of all stocks above their 50 and 200 day moving averages is in
decline and various breadth indicators are turning down.
In the chart below, we can see the percent of stocks above their 200
day moving average and how the stock market is currently at elevated
levels which have proven to be tops before a number of both mild and as
well as significant declines.
It’s easy to see that the stock market has arrived at a
quadruple top level with 82% of S&P 100 stocks above their 200 day
moving averages. History would suggest that the stock market has
reached a point at which it needs to retrench to some degree before it
could advance farther.
Major declines associated with current levels include a 17% dip
in 2007, a 15% slide in 2010 and an 18% drop in 2011, all occurring
within the space of 3-6 months. Of course, no one can forecast if, when
or how deep such a retrenchment might be, however, it will take a
powerful catalyst to push the stock market higher from today’s
chart courtesy of StockCharts.com
ETF News You Can Really Use.
For the week, the S&P 500 (NYSEARCA:SPY) eked out a 0.1% gain while the Dow Jones Industrial Average (NYSEARCA:DIA) fell for the second straight week, slipping 0.1%. The Nasdaq (NYSEARCA:QQQ) followed suit with a decline of 0.1% for the week.
The big news for the stock market hit Friday with Wal Mart declining
2.5% after the leak of an internal company email that described February
sales as a “total disaster.” The company has an upcoming earnings
report on February 21st which will be closely watched to gauge the
health of the American consumer.
In economic reports, the University of Michigan consumer sentiment
index rose to 76.3 and the Empire State Manufacturing index regained
positive ground after several months in the negative column. Retail
sales were marginally higher, initial unemployment claims dropped to
341,000 and industrial production slipped 0.1% in January.
Merger activity was also hot last week as Warren Buffett bought H.J.
Heinz Co. and American Airlines joined U.S. Airways in a merger.
The sequestration countdown continues with just ten days
remaining to March 1st when the automatic spending cuts are scheduled to
kick in. Last week the Senate proposed a plan that included both
revenue and spending cuts which was rejected by the House, and to make
matters more interesting, the House voted to go into recess on Friday,
leaving just four days in session to make a deal. Both sides appear to
be blaming each other for the deadlock and so the possible outcomes
start to narrow as the clock ticks.
One outcome would be some kind of real deal to avoid the mandatory
cuts but still put the nation’s finances on a better course. The second
outcome would be more of what has happened before, a last minute,
band-aid agreement that simply postpones the day of reckoning for
another day. The third possible outcome is that the sequestration cuts
go into effect which would result in immediate and substantial
reductions in spending and an unknown amount of turmoil in global
Next week brings an array of economic reports including February Home
Builders Index, housing starts, the minutes from the last Federal
Reserve meeting, PMI and the Philadelphia Fed report, all happening
before Thursday in the holiday shortened week.
Bottom line: Significant technical and fundamental factors point
to an increasingly risky period for the stock market between now and
March 1st. Stock market participants have become accustomed to last
minute “saves” by politicians and the Federal Reserve and appear to be
betting on another rabbit being pulled out of the hat between now and
the end of February. Should the rabbit not materialize, the stock
market will likely react in a negative way with increasing volatility
Learn more about sequestration and stock market trading strategies with the free Wall Street Sector Selector ETF Review.
02-18-2013 1:54 PM