After a tumultuous second second quarter, broad U.S. stock exchange traded funds are now range bound, dancing around their short-term moving averages.
The SPDR S&P 500 (SPY) is 1.0% above its 50-day exponential moving average, PowerShares Nasdaq 100 (QQQ) is 1.1% above its 50-day EMA, and SPDR Dow Jones Industrial Average (DIA) is 1.0% above its 50-day EMA.
Broad U.S. stocks dipped below their short-term moving averages mid-June as the Fed “tapering” talks sent scared investors away. [S&P 500 and Dow ETFs Test 50-Day Moving Average]
U.S. stocks, though, has since retraced some lost ground as quantitative easing speculation waned and investors focused more on the improving economy. For instance, on Friday, the jobs report was better-than-expected, with employers adding 195,000 new jobs in June.
Nevertheless, investors should not become too complacent as there are still some risks to consider.
For instance, mass protests under the Morsi regime has created political instability in Egypt. Egyptian stocks plunged during the last political bout when the country ousted Mubarak during the so-called Arab Spring.
China, the second largest economy in the world, is showing signs of fatigue. Economic growth is slowing and potential problems in their credit market is making the world nervous.
A political crisis in Portugal has also brought the Eurozone crisis back into focus. The severe austerity measures to keep the country solvent has put additional stress on the economy.
Back in the states, we are facing a rising rate environment, which could accelerate if the Federal Reserve begins to cutback on its monthly bond purchasing plan.
With the potential risks floating around, it is important for an investor to have a strategy in place, so that he or she would invest based on sound logical decisions instead of a gut feeling. For instance, we track a long-term trend following strategy centered around the 200-day exponential moving average. If an ETF breaks above the trend, it is a buy signal. On the other hand, if the trends start to weaken, it is a sign to get out. [An ETF Trend-Following Plan for All Seasons]
For more information on the trend following strategy, visit our trend following category.
Max Chen contributed to this article.
The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.