The SPDR ETF (SPY) Faces Pressure As The Market Approaches Overbought Levels

Last week major indexes and ETFs remained overbought and the week brought some major and interesting developments in both stock and bond markets.  In our Standard Exchange Traded Fund (ETF)  Portfolio we went to cash on Monday and logged the following realized gains, excluding taxes and commissions:

Position #1: +6.0%
Position #2: +6.9%
Position #3: +3.6%
Position #4: +6.8%
Position #5: +6.7%

These were entered on February 24th and as indicated in the Instrader, we are still in the “Yellow Flag” mode and expect choppy prices ahead.  However, we are rapidly approaching a new “sell” signal which could come as early as this week.

Looking At My Screens

It was an interesting week as major indexes remained overbought even as momentum weakened.

In the S&P 500 ETF (SPY) chart you can see RSI remaining at overbought levels while the MACD continued moving towards a “sell” signal on the daily chart. Also, Thursday’s action saw a significant reversal day as the S&P broke to new highs but then closed lower on the day.

Also this week, the bond market took a serious hit due to dismal response to this week’s record auctions as indicated in the chart below ETF (TBF) where you see a sudden gap lower in bond prices as yields jumped to near nine month highs. We have been talking for sometime about a bond bubble forming and this could be the first pinprick in that vulnerable market.

The View from 35,000 Feet

This week’s economic news was mixed as existing home sales, durable goods orders, new home sales and the downward revision to the 4th QTr GDP all disappointed while employment showed improvement on the new and continuing claims levels and consumer sentiment ticked up while the Greece debt crisis was at least partially defused with the European Union turning to the International Monetary Fund to help clean up their house.

On the bearish front, recent data from Dr. Robert Shiller points to the S&P 500 being overvalued by nearly 30% based on historical P/E ratios and the oil market logged in with significant declines late in the week as the sustainability of the recovery and corresponding demand was brought into question by the downward revision in GDP. Commodities showed continued weakness which could also be interpreted as bearish for the market as risk assets have been lately moving in tandem and the dollar continues showing substantial strength in its role as a safe haven in uncertain times.

Israel followed India in raising interest rates while unemployment climbed in 27 states in February.

Bullish sentiment remains high among market players as newsletter writers remain largely bullish, the call/put option ratio is strongly bullish and portfolio managers’ cash on hand is near historical lows while the VIX, the “fear indicator,” remains in the teens which would indicate further complacency in the markets.

What It All Means

It all adds up to a fascinating period where the major indexes managed to pick up small gains on low volume in the face of mixed economic news. Technically the markets remain vulnerable while fundamentally we continue to see problems ranging from sovereign debt, rising interest rates and bullish sentiment. Seasonally, we are rapidly approaching the “sell in May and go away” period and so while nobody has a crystal ball, the best bet would appear to be on a sideways to down market for the short term.

Regardless, I am neither bull nor bear and we will position ourselves according to our indicators and tune out the overwhelming avalanche of noise in today’s wired world.

The Week Ahead

This will be a big week for economic reports with the headline grabber coming on Friday with the Non Farm Payroll Report. Interestingly, markets will be closed for Good Friday and so won’t have a chance to react to that number until after Easter weekend. Job growth of 195,000 is expected so a deviation either side of that number could make for an interesting Monday morning following the holiday weekend. Overall unemployment is expected to remain at 9.7%.

Major economic reports include:

Monday: February Personal Income, February Personal Spending

Tuesday:January Case/Shiller Home Price Index, March Consumer Confidence

Wednesday: ADP Employment March Change, March Purchasing Managers Index, February Factory Orders

Thursday: Initial Unemployment Claims, Continuing Unemployment Claims, March ISM Index, February Consumer Spending, March Auto Sales

Friday: March Non Farm Payrolls, March Unemployment Rate

Sector Spotlight:

Leaders: Turkey, Persian Gulf States

Laggards: Natural Gas, Gold Miners, Oil and Gas Exploration

-Written By John Nyaradi From Wall Street Sector Selector

Here are some details on the two ETFs mentioned in the article:

The SPDR® S&P 500® ETF (SPY) is a fund that, before expenses, generally corresponds to the price and yield performance of the S&P 500 Index (Ticker: SPTR). Our approach is designed to provide portfolios with low portfolio turnover, accurate tracking, and lower costs.

The investment ETF (TBF) seeks daily investment results, before fees and expenses, which correspond to the inverse of the daily performance of the Barclays Capital 20+ Year U.S. Treasury Bond Index. The fund normally invests 80% of assets in financial instruments with economic characteristics that should be inverse to those of the index. It may employ leveraged investment techniques in seeking its investment objective. The fund is nondiversified.

Related posts:

1. ETF Investors Will Look To Buy Gold And Tech As The Next Market Correction Nears (GLD, QQQQ, SPY, GDX)
2. ETF RoundUp: Oversold Asia and Tech in the Balance (QQQQ, SPY, DIA, IWM, QLD, RSU, DXD)
3. S&P 500 To Hit 1000 This Summer? (ETF: SPY, SSO)

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