Last week’s stock market decline and ongoing problems with Europe and the Congressional “super committee” have stock market bulls on the ropes and now we’re going to find out if they’re down for the count.
On a technical basis, major U.S. indexes stand at a crossroads and really it’s not too strong to say that the world stands at crossroads with events in Europe on edge and Congress apparently unable to come to a meaningful deficit reduction agreement. All eyes will be on Europe in this holiday shortened week and there is also important economic news coming before Turkey Day.
The bulls are hanging on by a thread and the coming days will be critical for global stock markets and the global economy.
On My Wall Street Radar
chart courtesy of www.stockcharts.com
In the chart of the S&P 500 above (NYSEARCA:IVV) it’s immediately obvious that the last significant level of support is at the 1200 level and the 50 day moving average at 1206. A significant break below these levels would be extremely bearish on a technical level. Short term momentum is down while the general market is moving towards oversold levels.
A bounce here would be required for the bulls to retain control of the overall market.
The Economic View From 35,000 Feet
Overall economic news at home continues to show improvement, however, that is being trumped by the news from Europe where uncertainty reigns. Over the weekend, Spanish voters dumped their government as the game of musical Prime Ministers continues and the European leaders search for a solution.
Calls for European Central Bank intervention are growing more strident along with proposals to strengthen the overall structure of the union. It looks very much like markets aren’t going to wait for “austerity” or changes to take hold, and so the question comes down to whether or not the ECB is going to print money or not. There are legal problems here but one proposal being floated is for increased involvement in the crisis by the International Monetary Fund and perhaps the ECB lending money to the IMF which would in turn backstop Italy and Spain. It just doesn’t get any more exciting than this.
Reportedly, the European Commission is going to release proposals on Wednesday regarding moves towards a European federation, increased economic governance and even establishment of a Eurobond after the rules are changed and, of course, any real moves in this direction could be a significant game changer.
At home, it appears that the Congressional super committee will come up short and not deliver an agreement which won’t help Congress’s public image nor calm markets. The mandatory spending cuts are supposed to kick in if they fail, however, there is even talk among Congressional leaders about rescinding those. All of this can only be bad news for markets, for the U.S. credit rating, and can only eventually lead us one day to find ourselves in the position currently occupied by Italy, Spain and the rest of the PIIGS.
With all of the volatility, many investors are looking at alternatives for fixed income and iShares’ Russ Koesterich addresses this issue in his recent article, “Stepping Off the Sidelines With Fixed Income ETFs.”
This was a common theme for the week as leading ETFs included many fixed income ETFs, particularly in the Treasury market like iShares Barclay 20 Year+ Treasury Bond Fund (NYSEARCA:TLT) and Vanguard Extended Duration Treasury Index (NYSEARCA:EDV) as investors fled the volatility of the equities market.
Many important economic reports come this holiday shortened week with October Home Sales on Monday, 3Q GDP revision, November Richmond Fed and FOMC minutes on Tuesday, weekly jobs reports, October income and spending, October durable goods and November consumer sentiment on Wednesday leading into the Thanksgiving Holiday.
But none of this really matters as global investors worry about Europe.
Bottom Line for Stock Market and ETF Investors
Bottom line is more volatility ahead and remarkable danger and opportunity as we head towards the end of the year. If the European Central Bank or governing body comes up with a money printing plan or credible solution, we can expect a sudden and powerful stock market rally. If no significant solution is found, global markets will continue to run scared. On a technical basis, a break below current levels would be extremelty bearish. Members be sure to check your email for our specific outlook and positions.
Disclaimer: Wall Street Sector Selector actively trades a wide range of exchange traded funds (ETFs) and positions can change at any time.