The Fireworks Are About to Start: Weekly ETF and Stock Market Outlook

October 23, 2010

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The Fireworks Are About to Start: Weekly ETF and Stock Market Outlook

Courtesy of John Nyaradi, Wall St. Sector Selector

The Fireworks Are About to Start: Weekly ETF and Stock Market Outlook from Wall Street Sector Selector

Friday was a slow, slow day as far as volume was concerned but I think that we’re going to see a lot more volatility and a lot more volume in the week ahead.

The coming week precedes the election on November 2nd and the Fed announcement on “QE2” on Wednesday and so quite likely we’ll see some “sell the news” activity leading up to those two historic events as well as a response to the statements coming from the G20 meeting this weekend in South Korea regarding stabilization of the foreign currency exchange markets.

Overall, I expect that the fireworks are about to start.

Looking At My Screens

We have been in a consolidation pattern on major indexes for the past several days and last week’s action was choppy, to say the least. Tuesday saw the big correction, followed by a ‘buy the dip’ rally on Wednesday, a failed follow through rally on Thursday and a flat Friday with the major indexes ending up slightly higher for the week.

Internals remain weak as volume, breadth and overall participation remain low and, as always, these are indications of a weak market.

But the big news last week that went mostly unreported was in the U.S. Dollar that snapped a 5 week losing streak and likely found support at the G20 meeting wrapping up this weekend.

chart courtesy of StockCharts.com

In the USD chart you can see how the Dollar has come off a strong bottom and its MACD has turned positive along with the RSI coming off oversold levels. The thin black line is the S&P 500 and it’s easy to see how the S&P and Dollar have moved inversely to each other for the last several months.

If the dollar is making a change of direction here and a move up, it’s quite likely that stocks, gold and commodities would maintain their inverse correlation and so could make a move down.

Furthermore, investor sentiment is running 2 to 1 in favor of the bulls which represents excessive optimism and is a bearish indication while the market remains overstretched and overbought by almost any measurement.

The View from 35,000 Feet

The news this week was mixed, with corporate earnings beating expectations and economic news less positive.

So far 85% of reporting S&P companies have beaten estimates with positive earnings but several offered cloudy outlooks and much of the earnings growth is still related to cost cutting rather than top line growth.

Fitch reported that they may cut their ratings on Bank of America and Citicorp, along with others, over the new banking rules.

In the all important real estate market, clearcapital.com, an outfit that monitors the housing industry, reported a “sudden and dramatic drop in U.S. home prices” with a 5.9% decline over the last two months, a level not seen since March, 2009,” and they’re expecting other industry metrics to show similar declines in upcoming reports.

Finally, in South Korea, the U.S. took some heat from the Germans for going the “wrong way” by flooding the market with liquidity and China basically rebuffed all calls for letting its currency appreciate.

Bloomberg reported that the G20 “will move towards more market determined exchange rate systems…and refrain from competitive devaluation of currencies,” and U.S. Treasury Secretary Tim Geithner said he supports a “strong dollar.” (A glance to the USD chart above would indicate that either he failed in this policy or he has been woefully ignored.)

In any case, the G20 meeting adds an element of drama to the upcoming Federal Reserve meeting on November 2-3 and their plans for more quantitative easing which is particularly harmful to the dollar and won’t go down well around the world based on what Dr. Bernanke heard this weekend in South Korea.

What It All Means

High complacency coupled with extreme optimism and overbought conditions lead to a dangerous technical situation. Combined with increasing pressure on the U.S. to stop debasing the currency and the “sell the news” mentality of Wall Street, we could certainly be in for some volatile times in the week ahead.

Wall Street Sector Selector remains in the “red flag” mode, expecting lower prices ahead.

The Week Ahead

Economic reports this week will focus on the housing industry, initial GDP reports and consumer sentiment. Also the last full week of campaigning for the midterm election will be key as the market has apparently priced in “gridlock” and a deviation from this outcome could be a potential market mover.

Economic Reports:

Monday:

1000: September Existing Home Sales

Tuesday:

0900: August Case/Shiller Home Price Index

1000: October Consumer Confidence

1000: August FHFA Home Price Index

Wednesday:

0830: September Durable Goods

1000: September New Home Sales

Thursday:

0830: Initial Unemployment Claims, Continuing Unemployment Claims