SPDR S&P 500 ETF (SPY) was on track for a weekly decline of more than 1% to end a four-week up streak as investors fretted over hints the Federal Reserve may scale back its bond purchases and a sell-off in Japanese stocks.
“Markets are looking for a reset and a retracement lower, closer to more compelling valuations,” said Peter Kenny, chief market strategist at Knight Capita, in a Reuters report.
U.S. stock investors have spent the last two days wondering if Wednesday’s sharp intraday reversal is the opening salvo of a deeper correction. Equities have floated higher through most of 2013 on extremely low volatility and very few pullbacks.
Investors Intelligence technical analyst Tarquin Coe notes that Wednesday’s “opening blast to record highs” in the S&P 500 was drowned out after Fed chief Ben Bernanke and the minutes from the latest Fed meeting hinted the central bank may soon pull back on stimulus.
Late Tuesday, Bloomberg reported that Goldman Sachs predicted the rally could last another two and a half years, sending the S&P 500 up 26% to 2,100.
“Major tops are often marked by a brief euphoria spike and Wednesday’s morning action may have been just that,” Coe said in a newsletter.
“Short-term indicators are now unwinding as expected and we will now look for damage to the medium-term indicators, which are a bit slower to move,” the analyst said Friday. “One handy indicator for capturing tops is our count of weekly buying climaxes, where a stock makes a new 52-week high but closes down on the week. If there is no recovery by U.S. equities this afternoon, then we will have a shed-load of buying climaxes, possibly the greatest number in three years. They represent capitulation.”
In the major U.S. stock indices, the S&P 500 was on track for a 1.1% weekly decline in afternoon trading Friday, the Dow lost 0.4% and the Nasdaq Composite shed 1.3%.
The top three unleveraged ETFs this week were Market Vectors Junior Gold Miners (GDXJ), VelocityShares Long VIX Short Term (VIIX) and ProShares VIX Short-Term Futures (VIXY) with gains of at least 4%.
The bottom three unleveraged ETFs were Global X FTSE Greece 20 ETF (GREK), DBX MSCI Japan Currency-Hedged Equity (DBJP) and Market Vectors India Small-Cap (JO) with setbacks of 8% or more. [Individual Investors on the Hook for Japan ETF Losses]
Next week’s economic data features reports on Case-Shiller home prices, consumer confidence, pending homes sales, and personal income and spending. U.S. markets will be closed Monday for Memorial Day.
Full disclosure: Tom Lydon’s clients own SPY.
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