Friday was a very interesting day. The SPY traded up significantly and the price/volume characteristics suggest that the ETF (and the market itself) will trade up into or close to recent highs.
The spy has broken the trend line that had been established at the beginning of April on volume that is higher than relevant swing points This suggests that the SPY is going to test the next swing point, or around $140 price level. That said, it is our conjecture that the optimism reflected in share prices is built on fumes, namely the anticipation of some monetary action by the Federal Reserve. This is occurring amongst a lackluster economic environment, as revenue and earnings growth slow considerably. Unless the next monetary stimulus action actually propels the economy forward, then this optimism is likely misplaced. In contract, QE1, QE2, Operation Twist, and the other monetary actions by the Fed and other central banks have failed to accelerate economic growth. We think that a QE3 will be no different.
We also note the strength in the SPY is not being reflected in the small cap stocks. Above we present the IWN, the IShares Russell 2000 small cap stock index ETF. The upward swing in Friday was not confirmed by volume, and the downward trend that began in April remains.
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