The flow of Thursday’s upbeat economic news began with the Department of Labor’s report that initial unemployment claims for the week ending May 18 decreased by 23,000 to 340,000.  Economists had been expecting a slightly less-significant decline to 345,000 initial claims.  Weekly New Unemployment Claims at 340K

From the report:

In the week ending May 18, the advance figure for seasonally adjusted initial claims was 340,000, a decrease of 23,000 from the previous week’s revised figure of 363,000. The 4-week moving average was 339,500, a decrease of 500 from the previous week’s revised average of 340,000.

Also on Thursday, the Commerce Department’s Census Bureau reported that New Home Sales for April reached a seasonally-adjusted annual rate (SAAR) of 454,000 – beating expectations of 425,000 sales.  Because the rate of new home sales is considered the best leading indicator of economic health, this upside surprise will likely shape economists’ forecasts concerning the pace of the recovery.

From the report:

Sales of new single-family houses in April 2013 were at a seasonally adjusted annual rate of 454,000, according to estimates released jointly today by the U.S. Census Bureau and the Department of Housing and Urban Development. This is 2.3 percent (±12.8%)* above the revised March rate of 444,000 and is 29.0 percent (±20.7%) above the April 2012 estimate of 352,000.

The median sales price of new houses sold in April 2013 was $271,600; the average sales price was $330,800. The seasonally adjusted estimate of new houses for sale at the end of April was 156,000. This represents a supply of 4.1 months at the current sales rate.

The Markit Flash U.S. Manufacturing Purchasing Managers’ Index for May from Markit Economics was not exactly positive because it indicated a decline for the second consecutive month, falling to its lowest reading since last October.  Nevertheless, the reading of 51.9 (compared with April’s 52.1) beat economists’ expectations for a more significant drop to 50.8.  Jobless Claims Fall, Manufacturing Growth Slows in May

The Kansas City Federal Reserve’s Regional Manufacturing Survey for May was expected to increase to only a “less bad” negative 2 from April’s negative 5.  Nevertheless the composite index climbed to positive 2.

From the report:

Tenth District manufacturing activity improved somewhat, rising above zero for the first time in seven months, and producers’ expectations for future activity also increased. Most price indexes recorded little changes from the previous month.

The month-over-month composite index was 2 in May, up from -5 in both April and March (Tables 1 & 2, Chart). The composite index is an average of the production, new orders, employment, supplier delivery time, and raw materials inventory indexes. The rise in production came from both durable and non-durable goods-producing plants, with the biggest increase coming from machinery and metals manufacturing. Other month-over-month indexes were mixed. The production index edged up from 1 to 5, and the shipments, new orders, and new orders for export indexes also rose. In contrast, the employment index fell from -3 to -7, while the order backlog index was unchanged. The raw materials inventory index rebounded from -17 to 0, and the finished goods inventory index moved slightly higher.

The major ETFs expected to respond to the Department of Labor’s report on initial unemployment claims, the Census Bureau’s report on April New Home Sales, the Markit Flash U.S. Manufacturing PMI for May and the Kansas City Fed’s Regional Manufacturing Survey for May are:

Consumer Staples Select Sector SPDR ETF (NYSEARCA:XLP):  -0.41%

SPDR S&P Retail ETF (NYSEARCA:XRT):  +0.51%

Consumer Discretionary Select Sector SPDR ETF (NYSEARCA:XLY):  -0.21%

Industrial Select Sector SPDR ETF (NYSEARCA:XLI):  -0.27%

SPDR S&P Homebuilders ETF (NYSERACA:XHB):  +0.54%

Bottom line:  Thursday’s economic reports demonstrate that the economy continues to make a better-than-expected recovery despite the budget sequester.

The Chicago Board Options Exchange volatility index (VIX) spent the day comfortably above its 50-day moving average while the major stock indices went on a roller coaster ride.  Stocks spent the entire morning in the red, as investors reacted to news that the economic slowdown in China brought the HSBC Flash Manufacturing PMI into the range of contraction.  Beyond that, the Japanese stock market took a severe nosedive as soaring government bond yields scared the nation’s investors.  Japanese Stock Market

The S&P 500 dropped as low as 1,635 before upbeat economic data restored investor enthusiasm.  Stocks lost their momentum between 1:00 and 2:00, as the flow of better-than-expected economic reports probably scared investors into thinking that quantitative easing could end sooner than expected.  With the exception of the Russell 2000, the major stock indices finished the day in negative territory.  Negative Session, But Well Off the Lows

The VIX finished Thursday’s session with a 1.81 percent advance to 14.07, after breaking above its 200-day moving average for the first time since April 22.  The VIX had a volatile day, jumping to 15.11 just after 10:00 and falling to 13.87 less than 90 minutes later.  The VIX spent the entire day above its 50-day moving average of 13.46 as its lowest point of the day was 13.87.   Its Relative Strength Index rose from Wednesday’s 53.67 to 55.26.  Although both the MACD and the signal line remain below the zero line (which usually suggests a decline) the MACD has crossed above the signal line, which suggests a continued advance.

VIX ETF Update: 

Volatility Index – New Methodology (VIX): Index:  14.07,  +1.81%,

iPath S&P 500 VIX Short-Term Futures ETN (NYSEARCA:VXX):  +0.81%, This ETN is designed to track volatility in the markets as measured by the Chicago Board Options Exchange Market Volatility Index (CBOE Index), a popular measure of the implied volatility of S&P 500 index options.

VelocityShares Daily 2X VIX Short-Term ETN (NYSEARCA:TVIX):  +1.50%, This ETN is designed to track 2X return on volatility in the markets as measured by the S&P 500 VIX Short-Term Futures Index.

iPath S&P 500 VIX Mid-Term Futures ETN (NYSEARCA:VXZ):  +1.21%, This ETN is designed to track volatility in the markets as measured by the CBOE Volatility Index futures contracts.

S&P 500 Dynamic VIX ETN (NYSEARCA:XVZ):  +0.23%, This ETN is designed to track volatility in the markets as measured by the S&P 500 Dynamic VIX Futures Total Return Index.

Velocity Shares Daily Inverse VIX Short-Term ETN (NYSEARCA:XIV):  -0.74%, This ETN is designed to inversely track the volatility in the markets as measured by the S&P 500 VIX Short-Term Futures Index.

Bottom line:  The VIX spent Thursday’s trading session above its 50-day moving average – and broke above its 200-day moving average for the first time since April 22 – while stocks spent the day on a roller coaster.  Although the VIX finished the day with a relatively-modest 1.81-percent advance, technical indicators suggest that the VIX will be headed higher. 

The stock market was off to a bearish start in the morning, as investors reacted to news that the economic slowdown in China brought the HSBC Flash Manufacturing PMI into the range of contraction.  Beyond that, the Japanese stock market took a severe nosedive as soaring government bond yields scared investors.  The S&P 500 dropped as low as 1,635 before upbeat economic data facilitated a mood of bargain hunting.  Stocks lost their momentum between 1:00 and 2:00, as the flow of better-than-expected economic reports probably scared investors into thinking that quantitative easing could end sooner than expected.  By the closing bell, the Dow was just 12 points below Wednesday’s closing level.

The day’s most important economic surprise came from the Commerce Department’s report on April New Home Sales, which reached a seasonally-adjusted annual rate (SAAR) of 454,000 – beating expectations of 425,000 sales.  Because the rate of new home sales is considered the best leading indicator of economic health, this upside surprise will likely shape economists’ forecasts concerning the pace of the recovery.

The Dow Jones Industrial Average (NYSEARCA:DIA) lost 12 points to finish Thursday’s trading session at 15,294 for a 0.08 percent decline.  The S&P 500 (NYSEARCA:SPY) finished Thursday’s session with a 0.29 percent drop to close at 1,650.

The Nasdaq 100 (NASDAQ:QQQ) fell 0.26 percent to 2,991.  The Russell 2000 (NYSEARCA:IWM) advanced 0.21 percent to 984.

In other major markets, oil (NYSEARCA:USO) rose 0.24 percent to close at $33.54.

On London’s ICE Futures Europe Exchange, July futures for Brent crude oil advanced by 6 cents (0.06 percent) to $102.66/bbl. (NYSEARCA:BNO).

June gold futures declined by $1.40 (0.10 percent) to $1,390.40 per ounce (NYSEARCA:GLD).

Read “Gold Rebounds Now That Bernanke Is Done Talking”

Transports made it into first gear on Thursday, with the Dow Jones Transportation Index (NYSEARCA:IYT) advancing 0.12 percent.

In Japan, stocks sank after the nation’s ten-year bond yield reached 0.88 percent.  Although that might not sound like much, it is almost three times as high as the 0.315 percent yield on April 5.  During the last three hours of Thursday’s trading session, the Nikkei 225 Stock Average took a 7.32 percent nosedive to 14,483 (NYSEARCA:EWJ).

Read “Japan Stock Market Swoon”

In China, stocks sank after the HSBC Flash Manufacturing PMI report for May fell into contractionary territory at 49.6 (a seven-month low) from 50.4 in April.  Economists were expecting the reading to hold at 50.4.  The Shanghai Composite Index sank 1.13 percent to 2,275 (NYSEARCA:FXI).  Hong Kong’s Hang Seng Index took a 2.54 percent nosedive to 22,669 (NYSEARCA:EWH).

European stocks struggled on Thursday after the Markit Flash Eurozone PMI Composite Output Index for May rose to a “less bad” 47.7 from 46.9 in April.  Although the index reached a three-month high, it remained well within the zone of contraction (below 50).  The bad news from Japan and China helped dampen investors’ optimism about the global economy.  The Euro STOXX 50 Index finished Thursday’s trading session with a 2.05 percent drop to 2,776 – remaining above its 50-day moving average of 2,695 (NYSEARCA:FEZ).

Technical indicators reveal that the S&P 500 remains far above its 50-day moving average of 1,590 after closing at 1,650 – as bears continue to hope that we are watching the formation of a head-and-shoulders pattern, which would signal a further decline.  Its Relative Strength Index fell from 64.64 to 62.10 – dropping further below the threshold level of 70, which most investors consider an “overbought” signal.  Although both the MACD and the signal line continue soaring above the zero line (suggesting the likelihood of a further advance) the MACD has assumed a downward trajectory and is now at the signal line.  If the MACD crosses below the signal line, that would suggest the likelihood of a further decline.

Read “Ths SPX Broadening Ascending Wedge”

For the day, most sectors were negative, except for the materials and energy sectors, both of which advanced by 0.05 percent.  The utilities sector took the hardest hit, falling 0.68 percent.

Consumer Discretionary (NYSEARCA:XLY):  -0.21%

Technology:  (NYSEARCA:XLK):  -0.03%

Industrials (NYSEARCA:XLI):  -0.27%

Materials: (NYSEARCA:XLB):  +0.05%

Energy (NYSEARCA:XLE):  +0.05%

Financials: (NYSEARCA:XLF):  -0.61%

Utilities (NYSEARCA:XLU):  -0.68%

Health Care: (NYSEARCA:XLV):  -0.04%

Consumer Staples (NYSEARCA:XLP):  -0.41%

Bottom line:  A batch of better-than-expected economic reports saved the major stock indices from spilling more red ink after the shocking sell-off in Japan and the downbeat PMI report from China got the day off to a dismal start.      

The Japanese Stock Market fell off a cliff on Thursday after the nation’s ten-year bond yield reached 0.88 percent.  Although that might not sound like much, it is almost three times as high as the 0.315 percent yield on April 5, when the Bank of Japan cooperated with Prime Minister Shinzo Abe’s insistence on increased quantitative easing as part of his “Abenomics” program.  The “famous last words” of the month came from Bank of Japan governor Haruhiko Kuroda at the conclusion of the BOJ policy meeting which ended on Wednesday:

“I don’t think the recent rise in yields is having a big impact on the economy.”

Ooops!  Apparently the stock market did not agree with that assessment.  During the last three hours of Thursday’s trading session, the Nikkei 225 Stock Average took a 7.32 percent nosedive to 14,483 (NYSEARCA:EWJ).  By the closing bell in Tokyo, the yen had strengthened to approximately 101.7 per dollar from 103.57 earlier in the session.  A stronger yen results in less-competitive prices for Japanese exports in foreign markets (NYSEARCA:FXY). World’s Hottest Stock Market Creates Bearish Reversal Pattern

In China, stocks sank after the HSBC Flash Manufacturing PMI report for May fell into contractionary territory at 49.6 (a seven-month low) from 50.4 in April.  Economists were expecting the reading to hold at 50.4.  The Shanghai Composite Index sank 1.13 percent to 2,275 (NYSEARCA:FXI).  Hong Kong’s Hang Seng Index took a 2.54 percent nosedive to 22,669 (NYSEARCA:EWH).

European stocks had their own struggle on Thursday after more bad news from Markit Economics made it extremely difficult for investors to remain in denial about the European recession (NYSEARCA:VGK).  The Markit Flash Eurozone PMI Composite Output Index for May rose to a “less bad” 47.7 from 46.9 in April.  Although the index reached a three-month high, it remained well within the zone of contraction (below 50).  The bad news from Japan and China helped dampen investors’ optimism about the global economy.

The Euro STOXX 50 Index finished Thursday’s trading session with a 2.05 percent drop to 2,776 – remaining above its 50-day moving average of 2,695.  Its Relative Strength Index is 60.29, well below the threshold level of 70, which most investors consider as an “overbought” signal (NYSEARCA:FEZ).  The FTSE 100 Index fell 2.10 percent to 6,696 (NYSEARCA:EWU).

The German DAX Index sank 2.10 percent to 8,351 (NYSEARCA:EWG).  France’s CAC 40 Index fell 2.07 percent to 3,967 (NYSEARCA:EWQ).  Spain’s IBEX 35 Index declined 1.40 percent to 8,343 (NYSEARCA:EWP).  Italy’s FTSE MIB Index took a 3.06 percent nosedive to 17,008 (NYSEARCA:EWI).

As of 1:53 EDT, the euro advanced 0.63 percent against the dollar, trading at $1.2939 (NYSEARCA:FXE).

Spain’s ten-year bond yield climbed to 4.28 percent on Thursday from Wednesday‘s closing level of 4.17 percent (NYSEARCA:EWP).  Spain’s two-year bond yield rose to 1.85 percent on Thursday from Wednesday‘s closing level of 1.72 percent (NYSEARCA:EWP).

Italy’s ten-year bond yield climbed to 4.05 percent on Thursday from Wednesday‘s closing level of 3.95 percent (NYSEARCA:EWI).

On London’s ICE Futures Europe Exchange, July futures for Brent crude oil advanced by one penny (0.01 percent) to $102.61/bbl. (NYSEARCA:BNO, NYSEARCA:USO).  The Chinese Are Stealing Our Oil

June gold futures advanced by $23.70 (1.73 percent) to $1,391.10 per ounce (NYSEARCA:GLD).

American stock index futures were in negative territory ahead of Thursday’s opening bell as investors were spooked by the huge sell-offs in Japan and Europe.  The June 13 Dow Jones Industrials future fell 0.84 percent to 15,192 as of 9:12 EDT.  The June 13 S&P 500 future sank 0.93 percent to 1,640 (NYSEARCA:SPY).  The June 13 Nasdaq 100 future declined 0.80 percent to 2,077.

Bottom line:  Japan’s push for inflation reminded investors of the admonition: “Be careful what you wish for because you just might get it.”  As a result of increased investor fears of uncontrolled inflation beyond the 2 percent target, the spirit of risk aversion overtook the Japanese stock market, sending the Nikkei 225 Stock Average falling by 7.32 percent. 

It was the best of times and the worst of times  …  No, we are not talking about Two Cities, we are discussing how the stock market reacted to Wednesday’s testimony by Federal Reserve Chairman Ben Bernanke before the Joint Economic Committee.  After Dr. Bernanke spoke reassuringly about the Fed’s bond-buying program, the Dow and S&P 500 reached new record intraday highs.  Here is a passage from his testimony on that point:

At its most recent meeting, the Committee made clear that it is prepared to increase or reduce the pace of its asset purchases to ensure that the stance of monetary policy remains appropriate as the outlook for the labor market or inflation changes. Accordingly, in considering whether a recalibration of the pace of its purchases is warranted, the Committee will continue to assess the degree of progress made toward its objectives in light of incoming information. The Committee also reiterated, consistent with its forward guidance regarding the federal funds rate, that it expects a highly accommodative stance of monetary policy to remain appropriate for a considerable time after the asset purchase program ends and the economic recovery strengthens.

However, during the question and answer session, Dr. Bernanke remarked that the FOMC could begin to taper back its bond purchases if the economic data warranted it.  The mere possibility that Operation Taper could begin during the “next few meetings” obviously gave investors the jitters as the major stock indices immediately began to slide down from their record intraday highs.  Bernanke Vows to Keep Pedal to the Metal

Once the FOMC released the minutes of its April 30-May 1 meeting, commentators began to focus on the fact that some FOMC members wanted to initiate Operation Taper as early as June, leading some to speculate that the effort could begin during the third or fourth quarter of this year.  Fed Talk … Reversal 

Here is the passage from the FOMC Minutes which sparked speculation that Operation Taper could begin in June:

Participants also touched on the conditions under which it might be appropriate to change the pace of asset purchases. Most observed that the outlook for the labor market had shown progress since the program was started in September, but many of these participants indicated that continued progress, more confidence in the outlook, or diminished downside risks would be required before slowing the pace of purchases would become appropriate. A number of participants expressed willingness to adjust the flow of purchases downward as early as the June meeting if the economic information received by that time showed evidence of sufficiently strong and sustained growth; however, views differed about what evidence would be necessary and the likelihood of that outcome. One participant preferred to begin decreasing the rate of purchases immediately, while another participant preferred to add more monetary accommodation at the current meeting and mentioned that the Committee had several other tools it could potentially use to do so. Most participants emphasized that it was important for the Committee to be prepared to adjust the pace of its purchases up or down as needed to align the degree of policy accommodation with changes in the outlook for the labor market and inflation as well as the extent of progress toward the Committee’s economic objectives.

Also on Wednesday, the National Association of Realtors released its report on Existing Home Sales during April.  Although economists were expecting to see sales of existing homes increase to a seasonally-adjusted annual rate (SAAR) of 5 million in April from a SAAR of 4.92 million in March, the report indicated that the April SAAR had fallen a tad short of expectations at 4.97 million, although the SAAR for March had been revised upward to 4.94 million.

From the report:

Existing-home sales rose in April but remain below underlying demand because of limited inventory and tight credit, according to the National Association of Realtors.  All regions are showing strong price gains from a year ago.

Total existing-home sales, which are completed transactions that include single-family homes, townhomes, condominiums and co-ops, increased 0.6 percent to a seasonally adjusted annual rate of 4.97 million in April from an upwardly revised 4.94 million in March.  Resale activity is 9.7 percent above the 4.53 million-unit level in April 2012.

*   *   *

Existing-home sales are at the highest pace since November 2009 when the market spiked to 5.44 million in response to the home buyer tax credit.  Total sales have been above year-ago levels for 22 consecutive months, while prices show 14 consecutive months of year-over-year price increases.

Total housing inventory at the end of April rose 11.9 percent, a seasonal increase to 2.16 million existing homes available for sale, which represents a 5.2-month supply at the current sales pace, compared with 4.7 months in March. 

The major ETFs expected to respond to the Ben Bernanke’s testimony before the Joint Economic Committee and the report on April Existing Home Sales from the National Association of Realtors are:

iShares Dow Jones U.S. Financial Sector ETF (NYSEARCA:IYF)  -1.23%

SPDR S&P Regional Banking ETF (NYSEARCA:KRE):  -1.57%

Industrial Select Sector SPDR ETF (NYSEARCA:XLI)  -0.88%

iShares Russell 2000 ETF (NYSEARCA:IWM)  -1.46%  Learn More About iShares ETFs

iShares Dow Jones Real Estate ETF (NYSEARCA:IYR)  -2.48%

Bottom line:  There were no genuine surprises about the fate of quantitative easing from either Ben Bernanke or the FOMC Minutes from the April 30-May1 meeting.  The stock market’s reaction simply demonstrated the degree to which investors felt the Fed’s bond buying has been important for stock market liquidity.  The Existing Home Sales report for April revealed that “distressed sales” (short sales and foreclosure sales) were down while conventional sales had increased.

On a day when the S&P 500 swung from a record intraday high of 1,687.18 to finish the session 0.83 percent in the red, the Chicago Board Options Exchange volatility index (VIX) ended Wednesday’s trading session with a modest 3.37 percent advance.  On Monday, May 20, the VIX surged 4.58 percent following a downbeat Chicago Fed National Activity Index.  One would have thought that Wednesday’s dramatic swing by the S&P from 1,687 to a closing level of 1,655 would demonstrate more volatility than Monday’s swing from a high of 1,672 to close at 1,666.  Big Downside Reversal

The VIX finished Wednesday’s session with a 3.37 percent advance to 13.82, closing above its 50-day moving average for the first time since May 1.  The VIX had a volatile day, climbing from 13.05 to a high of 14.45 before falling to 13.82 during the last 30 minutes of the session.  The chart reveals that the 50-day moving average appears to be rising slightly from its level trajectory, although at 13.41 it remains significantly below the 200-day moving average of 14.90.  Its Relative Strength Index rose from Tuesday’s 50.77 to 53.67.  Although both the MACD and the signal line remain below the zero line (which usually suggests a decline) the MACD has crossed above the signal line, which indicates a likely advance.  Every Time This Signal Emerges, Markets Sell

VIX ETF Update: 

Volatility Index – New Methodology (VIX): Index: 13.82,  +3.37%,

iPath S&P 500 VIX Short-Term Futures ETN (NYSEARCA:VXX):  +1.09%, This ETN is designed to track volatility in the markets as measured by the Chicago Board Options Exchange Market Volatility Index (CBOE Index), a popular measure of the implied volatility of S&P 500 index options.  The CBOE Volatility Index is also known as the “fear” index or “fear” indicator in markets.  The iPath S&P 500 VIX Short-Term Futures ETN (NYSEARCA:VXX) prices itself off of the average and implied volatility of the first two months of futures contracts of the S&P 500 Index.

VelocityShares Daily 2X VIX Short-Term ETN (NYSEARCA:TVIX):  +2.30%,  This ETN is designed to track 2X return on volatility in the markets as measured by the S&P 500 VIX Short-Term Futures Index.  The S&P 500 VIX Short-Term Futures Index measures the volatility of the S&P 500 Index via futures contracts as traded on the CBOE.

iPath S&P 500 VIX Mid-Term Futures ETN (NYSEARCA:VXZ):  -0.77%, This ETN is designed to track volatility in the markets as measured by the CBOE Volatility Index futures contracts.  The CBOE Volatility Index is also known as the “fear” index or “fear” indicator in markets.  The iPath S&P 500 VIX Mid-Term Futures ETN (NYSEARCA:VXZ) is priced from the average volatility of the 4^th through 7^th month futures contracts of the S&P 500 Index as traded on the CBOE.

S&P 500 Dynamic VIX ETN (NYSEARCA:XVZ):  -0.68%, This ETN is designed to track volatility in the markets as measured by the S&P 500 Dynamic VIX Futures Total Return Index.  The S&P 500 Dynamic VIX Futures Total Return Index seeks to combine results of volatility of the S&P 500VIX Short-Term Futures Index Excess Return and the S&P 500 VIX Mid-Term Futures Index Excess Return to create an accurate market volatility reading, as measured by the CBOE.

Velocity Shares Daily Inverse VIX Short-Term ETN (NYSEARCA:XIV):  -1.07%, This ETN is designed to inversely track the volatility in the markets as measured by the S&P 500 VIX Short-Term Futures Index.  The S&P 500 VIX Short-Term Futures Index measures the volatility of the S&P 500 Index via futures contracts traded on the CBOE.

Bottom line:  On what was probably the most volatile trading day of the year, the VIX made a surprisingly modest, 3.37 percent advance.   

The stock market was off to a bullish start in the morning, as investors assumed that the testimony of Federal Reserve Chairman Ben Bernanke before the Joint Economic Committee would soothe their nerves about the fate of the quantitative easing program.  Investors took comfort in the following statement:

“At its most recent meeting, the Committee made clear that it is prepared to increase or reduce the pace of its asset purchases to ensure that the stance of monetary policy remains appropriate as the outlook for the labor market or inflation changes.”   

However, during the question and answer session, Bernanke remarked that the FOMC could begin to taper back its bond purchases if the economic data warranted it.  The mere possibility that Operation Taper could begin during the “next few meetings” obviously gave investors the jitters as the major stock indices immediately began to slide down from their record intraday highs.  Once the FOMC released the minutes of its April 30-May 1 meeting at 2:00, commentators began to focus on the fact that some FOMC members wanted to initiate Operation Taper as early as June, leading some to speculate that the effort could begin during the third or fourth quarter of this year.  Stocks continued their slide into the red.

The Dow Jones Industrial Average (NYSEARCA:DIA) dropped 80 points to finish Wednesday’s trading session at 15,307 for a 0.52 percent decline.  Nevertheless, the Dow managed to reach a new record intraday high of 15,542.40.  The S&P 500 (NYSEARCA:SPY) finished Wednesday’s session with a 0.83 percent decline to close at 1,655.  The S&P also reached a new record intraday high of 1,687.18.

The Nasdaq 100 (NASDAQ:QQQ) fell 0.90 percent to 2,999.  The Russell 2000 (NYSEARCA:IWM) sank 1.65 percent to 982 despite reaching a new record intraday high of 1,008.23.

In other major markets, oil (NYSEARCA:USO) sank 1.91 percent to close at $33.46.

On London’s ICE Futures Europe Exchange, July futures for Brent crude oil declined by $1.49 (1.43 percent) to $102.42/bbl. (NYSEARCA:BNO).

June gold futures declined by $14.30 (1.04 percent) to $1,363.30 per ounce (NYSEARCA:GLD).

Read “Sprott Is Bullish on Silver – and Gold – Equities”

Transports backed into a sinkhole on Wednesday, with the Dow Jones Transportation Index (NYSEARCA:IYT) falling 1.50 percent.

European stocks resumed their advance on Wednesday as strength in base metals and mining companies led to a rally in the commodities sector (NYSEARCA:VGK).  The Euro STOXX 50 Index finished Wednesday’s trading session with a 0.47 percent advance to 2,835 – remaining above its 50-day moving average of 2,695 (NYSEARCA:FEZ).

Read “European Stocks Resume their Advance”

In Japan, stocks surged as the yen continued to weaken.  After the close of the Japanese stock market the yen fell to 103.74 per dollar.  A weaker yen results in more competitive prices for Japanese exports in foreign markets (NYSEARCA:FXY).  The Nikkei 225 Stock Average jumped 1.60 percent to 15,627 (NYSEARCA:EWJ).

In China, stocks retreated after a five-day advance as investors became anxious about the HSBC Flash Manufacturing PMI report for May, which will be released on Thursday.  The Shanghai Composite Index declined 0.11 percent to 2,302 (NYSEARCA:FXI).  Hong Kong’s Hang Seng Index declined 0.45 percent to 23,261 (NYSEARCA:EWH).

Technical indicators reveal that the S&P 500 remains far above its 50-day moving average of 1,588 after closing at 1,655 – as bears continue to hope that we are watching the formation of a head-and-shoulders pattern, which would signal a decline.  Its Relative Strength Index fell from 72.51 to 64.64 – dropping back below the threshold level of 70, which most investors consider an “overbought” signal.  Although both the MACD and the signal line continue soaring above the zero line (suggesting the likelihood of a further advance) the MACD has assumed a downward trajectory toward the signal line.  If the MACD crosses below the signal line, that would suggest a the likelihood of a decline.

Read “Every Time This Signal Emerges, Markets Sell”

For the day, all sectors were solidly negative, except for the healthcare sector, which remained unchanged.  The hardest-hit groups were the utilities and materials sectors.

Consumer Discretionary (NYSEARCA:XLY):  -0.95%

Technology:  (NYSEARCA:XLK):  -1.09%

Industrials (NYSEARCA:XLI):  -0.88%

Materials: (NYSEARCA:XLB):  -1.36%

Energy (NYSEARCA:XLE):  -1.16%

Financials: (NYSEARCA:XLF):  -1.05%

Utilities (NYSEARCA:XLU):  -1.69%

Health Care: (NYSEARCA:XLV):  (unchanged)

Consumer Staples (NYSEARCA:XLP):  -0.17%

Bottom line:  Fears about the Fed’s plans to taper back quantitative easing erased Wednesday’s record-high gains as a result of increased speculation that a reduction in Federal Reserve bond-buying could begin during the third or fourth quarter of this year.   

European stocks resumed their advance on Wednesday as strength in base metals and mining companies led to a rally in the commodities sector (NYSEARCA:VGK).  Despite the fact that there were no upbeat economic reports which could fuel investor enthusiasm, the major European stock indices are benefiting from “animal spirits” and hope that the European Central Bank can craft a solution for the region’s ongoing recession.  Eurozone Troubles Starting to Show in Corporate Earnings

The Euro STOXX 50 Index finished Wednesday’s trading session with a 0.47 percent advance to 2,835 – remaining above its 50-day moving average of 2,695.  So far, the STOXX 50 has been above 2,700 throughout the month of May.  Its Relative Strength Index is 63.89, well below the threshold level of 70, which most investors consider as an “overbought” signal (NYSEARCA:FEZ).  The FTSE 100 Index climbed 0.53 percent to 6,840 as it continues to approach its record high of 6,950.60 which was reached in 1999 (NYSEARCA:EWU).

The German DAX Index advanced 0.69 percent to 8,530 (NYSEARCA:EWG).  France’s CAC 40 Index rose 0.37 percent to 4,051 (NYSEARCA:EWQ).  Spain’s IBEX 35 Index dipped 0.02 percent to 8,462 (NYSEARCA:EWP).  Italy’s FTSE MIB Index climbed 0.68 percent to 17,545 (NYSEARCA:EWI).

As of 2:17 EDT, the euro declined 0.36 percent against the dollar, trading at $1.2860 (NYSEARCA:FXE).

Spain’s ten-year bond yield advanced to 4.20 percent on Wednesday from Tuesday‘s closing level of 4.19 percent (NYSEARCA:EWP).  Spain’s two-year bond yield advanced to 1.73 percent on Wednesday from Tuesday‘s closing level of 1.69 percent (NYSEARCA:EWP).

Italy’s ten-year bond yield rose to 3.96 percent on Wednesday from Tuesday‘s closing level of 3.95 percent (NYSEARCA:EWI).

On London’s ICE Futures Europe Exchange, July futures for Brent crude oil declined by $1.49 (1.43 percent) to $102.42/bbl. (NYSEARCA:BNO, NYSEARCA:USO).

June gold futures declined by $14.30 (1.04 percent) to $1,363.30 per ounce (NYSEARCA:GLD).  Gold Continues to Fail at $1400, No Momentum Allowed

In China, stocks retreated after a five-day advance as investors became anxious about the HSBC Flash Manufacturing PMI report for May, which will be released on Thursday.  The Shanghai Composite Index declined 0.11 percent to 2,302 (NYSEARCA:FXI).  Hong Kong’s Hang Seng Index declined 0.45 percent to 23,261 (NYSEARCA:EWH).

In Japan, stocks surged as the yen continued to weaken.  After the close of the Japanese stock market, the yen fell to 103.74 per dollar.  A weaker yen results in more competitive prices for Japanese exports in foreign markets (NYSEARCA:FXY).  The Nikkei 225 Stock Average jumped 1.60 percent to 15,627 (NYSEARCA:EWJ).

American stock index futures were in positive territory ahead of Wednesday’s opening bell, as investors hoped for good news about the future of quantitative easing during the testimony of Federal Reserve Chairman Ben Bernanke before the Joint Economic Committee.  The June 13 Dow Jones Industrials future advanced 0.18 percent to 15,383 as of 9:12 EDT.  The June 13 S&P 500 future rose 0.22 percent to 1,669 (NYSEARCA:SPY).  The June 13 Nasdaq 100 future climbed 0.32 percent to 3,031.

Bottom line: After a brief pause on Tuesday, European stocks continued to climb, despite the absence of any economic news which would suggest that there is any end in sight for the region’s recession. 

Usually, there is a great deal of interest in the FOMC minutes when they are released by the Federal Reserve.  Approximately three weeks after each meeting of the Fed’s Federal Open Market Committee (FOMC) the minutes from the FOMC meeting become available on the Fed’s website.

In the past, investors have excitedly awaited release of the FOMC minutes for hints as to whether a new quantitative easing program would be implemented or whether an ongoing program would be extended.  Will Wednesday’s Fed Minutes Spark Sell-Off?

These days, inquiring minds want to know how much life remains in the current program (QE 4).  With the next FOMC meeting scheduled for June 18, there is a great deal of concern about what the June 18 FOMC Statement will report about the fate of quantitative easing.

On Friday May 10, Jon Hilsenrath of The Wall Street Journal reported (after the stock market was closed for the weekend) that the Fed had established a plan to taper back the Fed’s bond buying.  Since that time, there has been a great deal of speculation about the questions of when and how Operation Taper will be implemented.

On May 9 we heard from Philadelphia Federal Reserve president Charles Plosser, who remarked that he would advocate a plan to scale back the quantitative easing program at the June 18 FOMC meeting.  Until that moment, Kansas City Federal Reserve President Esther George had been the only sitting FOMC member to vote against ongoing bond buying at the FOMC meetings.  Dallas Federal Reserve President Richard Fisher also spoke out on May 9, explaining that the lack of job creation has been a result of poor fiscal policy rather than monetary policy.  Fisher emphasized that monetary policy had accomplished all it could in stimulating the economy and that ongoing bond buying by the Fed amounts to “overkill”.

On Monday, May 20, Chicago Federal Reserve President (and FOMC member) Charles Evans spoke at the CFA Society Chicago.  Evans explained that although the economic recovery has made progress, he would prefer to see the unemployment rate drop below the 6.5 percent threshold previously discussed by Chairman Bernanke as the point after which the Fed would attempt to wean the country away from monetary stimulus.  (Dr. Bernanke has pointed out that there would be some lag time before the Fed would end its bond buying after meeting the thresholds to make sure that the progress had some traction.)  Evans pointed out that he would be willing to see the threshold for the inflation rate as low as approximately 2 percent before QE would be wound down.  Bernanke has previously indicated that the inflation rate threshold should be 2.5 percent.  Curiously, Mr. Evans does not believe that a gradual, tapering approach is necessary for terminating QE.  He believes in tearing off the Band-Aid.

William Dudley, president of the Federal Reserve Bank of New York (FRBNY) gave a speech before the Japan Society in New York City on May 21.  After comparing Japan’s approach to quantitative easing with that used by the FOMC, Dudley explained that the FOMC had been too optimistic about growth during the 2009 – 2012 period.  As a result, the monetary stimulus had been inadequate.  Is the Fed Failing to Inflate the Economy?

Finally, Mr. Dudley discussed the future of QE:

In the U.S., in recent months we have communicated that short-term rates are likely to stay very low for a long time; our balance sheet is likely to increase further in size and then stay large for a long time; and that we will not be overly hasty in tightening monetary policy once the recovery gets well established.  By doing this, we are influencing expectations about the likely future path of short-term rates and the interest rate term premium.  By utilizing the expectations channel in this way, we have been able to make policy more accommodative and generate easier financial market conditions.  

With Ben Bernanke taking center stage before the Joint Economic Committee, inquiring minds will want to know about the fate of the Fed’s bond buying program.  Unfortunately, we will not have a definite answer until June 18.

The major ETFs expected to respond to the Ben Bernanke’s testimony before the Joint Economic Committee are:

iShares Dow Jones U.S. Financial Sector ETF (NYSEARCA:IYF):  +0.19%

SPDR S&P Regional Banking ETF (NYSEARCA:KRE):  (unchanged)

Industrial Select Sector SPDR ETF (NYSEARCA:XLI):  +0.14%

iShares Russell 2000 ETF (NYSEARCA:IWM):  +0.04%  Learn More About iShares ETFs

iShares Dow Jones Real Estate ETF (NYSEARCA:IYR):  +0.47%

Bottom line:  Although many commentators are expecting the Fed to begin tapering back its bond buying within the next four months, implementation of Operation Taper might not take place until the unemployment and inflation rate thresholds are reached. 

Many investors have been watching the Chicago Board Options Exchange Volatility Index (VIX) for a signal as to when the stock market rally will be running out of gas.  The fact that the VIX jumped 4.58 percent on Monday – despite the fact that both the Dow and S&P 500 reached record intraday highs – resulted in some commentary to the effect that investor confidence in the rally could be waning.  Tuesday’s 2.69 percent surge by the VIX – despite record intraday and closing highs by the Dow and S&P 500 reinforced those suspicions.

A good deal of attention was focused on the fate of the Federal Reserve’s quantitative easing program on Tuesday because Federal Reserve Chairman Ben Bernanke will be testifying before the Joint Economic Committee on Wednesday.  In fact, Tuesday morning’s stock advance has been explained as the result of a speech, given by St. Louis Federal Reserve president James Bullard in Frankfurt about the future of quantitative easing.  As a member of the Fed’s Federal Open Market Committee (FOMC), Bullard raised hopes that quantitative would continue with his remark that the Fed should continue its bond-buying program.

Another FOMC member, New York Fed president William Dudley explained during a speech on Tuesday that he has not yet made a decision as to whether the Fed’s bond-buying should be tapered back or increased.  Many commentators have assumed that Dudley was a champion for cutting back on quantitative easing.  With the fate of the Fed’s bond buying program on investors’ minds, it is easy to understand a surge in stock market volatility.  Is the Fed Failing to Inflate the Economy?

Despite its big advance on Monday, the VIX was unable to pop above its 50-day moving average at any point during the session.  However, on Tuesday the VIX closed just a tick below its 50-day moving average of 13.38 after reaching a high of 13.44.  Between May 3 and Monday, the VIX made only three brief pops above its 50-day MA.

The VIX finished Tuesday’s session with a 2.69 percent jump to 13.37, just short of its 50-day moving average of 13.38.  The VIX had a volatile day, climbing as high as 13.44 before falling to 12.89 just after 1:00.  The chart reveals that the 50-day moving average appears to be rising slightly from its level trajectory, although it remains below the 200-day moving average of 14.92.  Its Relative Strength Index rose from Monday’s 48.43 to 50.77.  Although both the MACD and the signal line remain below the zero line (which usually suggests a decline) the MACD has just crossed above the signal line, which indicates a likely advance.  Is It Time to Hit the Pause Button?

VIX ETF Update: 

Volatility Index – New Methodology (VIX): Index: 13.37,  +2.69%,

iPath S&P 500 VIX Short-Term Futures ETN (NYSEARCA:VXX):  +0.88%

VelocityShares Daily 2X VIX Short-Term ETN (NYSEARCA:TVIX):  +1.16%

 iPath S&P 500 VIX Mid-Term Futures ETN (NYSEARCA:VXZ):  +1.71%

S&P 500 Dynamic VIX ETN (NYSEARCA:XVZ):  +0.89%

Velocity Shares Daily Inverse VIX Short-Term ETN (NYSEARCA:XIV):  -0.89%

Bottom line:  The VIX advanced 2.69 percent on a day when both the Dow Jones Industrial Average and the S&P 500 reached new record intraday and closing highs.

Stocks resumed their climb skyward at approximately 10:30 EDT on Tuesday after St. Louis Federal Reserve president James Bullard spoke in Frankfurt about the future of quantitative easing.  As a member of the Fed’s Federal Open Market Committee (FOMC), Bullard raised hopes that quantitative would continue with his remark that the Fed should continue its bond-buying program.

Another FOMC member, New York Fed president William Dudley explained during a speech on Tuesday that he has not yet made a decision as to whether the Fed’s bond-buying should be tapered back or increased.  Many commentators have assumed that Dudley was a champion for cutting back on quantitative easing.

The speeches by two members of the FOMC – which will be meeting again on June 18 – raised investors’ hopes that the Fed’s widely-publicized plans to cut back on its bond purchases will be delayed until economic reports become more uniformly positive.

The Dow Jones Industrial Average (NYSEARCA:DIA) gained 52 points to finish Tuesday’s trading session at a new record high close of 15,387 for a 0.34 percent advance.  The Dow reached a new record intraday high of 15,434.50.  The S&P 500 (NYSEARCA:SPY) finished Tuesday’s session with a 0.17 percent advance to a new record-high close at 1,669.16.  The S&P reached a new record intraday high of 1,674.93.  The big question at this point is whether the S&P 500 will reach 1,700.

The Nasdaq 100 (NASDAQ:QQQ) advanced 0.18 percent to 3,026.  The Russell 2000 (NYSEARCA:IWM) advanced 0.08 percent to a new record-high close of 998.78.

In other major markets, oil (NYSEARCA:USO) declined by 0.96 percent to close at $34.11.

On London’s ICE Futures Europe Exchange, July futures for Brent crude oil declined by $1.16 (1.11 percent) to $103.64/bbl. (NYSEARCA:BNO).

June gold futures declined by $10.10 (0.73 percent) to $1,374.00 per ounce (NYSEARCA:GLD).

Read “Gold Re-tests Lows on Asian Margin Selling, Rebounds”

Transports rolled forward on Tuesday, with the Dow Jones Transportation Index (NYSEARCA:IYT) advancing 0.06 percent.

European stocks retreated from their ongoing rally as widespread commentary focused on the impact of European Central Bank intervention on stock prices (NYSEARCA:VGK).  However, British stocks continued to advance following upbeat earnings reports from a number of retailers, such as Burberry’s as well as an encouraging report from Société Générale, which gave a boost to the mining sector (NYSEARCA:EWU).

The Euro STOXX 50 Index finished Tuesday’s trading session with a 0.10 percent dip to 2,821 – remaining above its 50-day moving average of 2,691.  So far, the STOXX 50 has been above 2,700 throughout the month of May (NYSEARCA:FEZ).

Read “European Stocks Stall on Tuesday”

In Japan, stocks made a modest advance as the yen remained at approximately 102.5 per dollar (NYSEARCA:FXY).  The plans announced by Prime Minister Shinzo Abe for what is referred to as the “third arrow” of his “Abenomics” program gave a boost to Kobe Steel and other stocks in the base metals sector.  The Nikkei 225 Stock Average advanced 0.13 percent to 15,381 (NYSEARCA:EWJ).

On China’s Shanghai Stock Exchange, stocks advanced on gains led by the solar sector.  The Shanghai Composite Index advanced 0.22 percent to 2,305 (NYSEARCA:FXI).  Hong Kong’s Hang Seng Index declined 0.54 percent to 23,366 (NYSEARCA:EWH).

Technical indicators reveal that the S&P 500 remains far above its 50-day moving average of 1,586 after closing at 1,669.16 – as bears continue to hope that we are watching the formation of a head-and-shoulders pattern, which would signal a decline.  Its Relative Strength Index rose from 71.85 to 72.51 – remaining above the threshold level of 70, which most investors consider an “overbought” signal.  Both the MACD and the signal line continue soaring above the zero line, suggesting the likelihood of a further advance.

Read “Coming Week Market Movers & Outlook for the Rest of 2013”

For the day, most sectors were positive, although the technology, energy and materials sectors were in the red.  The healthcare sector led the group, with the only advance in excess of one percent.

Consumer Discretionary (NYSEARCA:XLY):  +0.45%

Technology:  (NYSEARCA:XLK):  -0.31%

Industrials (NYSEARCA:XLI):  +0.14%

Materials: (NYSEARCA:XLB):  -0.12%

Energy (NYSEARCA:XLE):  -0.20%

Financials: (NYSEARCA:XLF):  +0.25%

Utilities (NYSEARCA:XLU):  +0.20%

Health Care: (NYSEARCA:XLV):  +1.09%

Consumer Staples (NYSEARCA:XLP):  +0.10%

Bottom line:  Investor enthusiasm sent the major stock indices to new record highs on Tuesday after two FOMC members explained that the Fed’s plans to taper back quantitative easing might not be on the front burner at the present time. 

European stocks took a pause from their ongoing rally as widespread commentary focused on the impact of European Central Bank intervention on stock prices (NYSEARCA:VGK).  Nevertheless, British stocks continued to advance following upbeat earnings reports from a number of retailers, such as Burberry’s as well as an encouraging report from Société Générale, which gave a boost to the mining sector (NYSEARCA:EWU).

The Euro STOXX 50 Index finished Tuesday’s trading session with a 0.10 percent dip to 2,821 – remaining above its 50-day moving average of 2,691.  So far, the STOXX 50 has been above 2,700 throughout the month of May.  Its Relative Strength Index is 68.35.  Most investors consider an RSI above 70 as an “overbought” signal (NYSEARCA:FEZ).  The FTSE 100 Index climbed 0.71 percent to 6,803 as it continues to approach its record high of 6,950.60 which was reached in 1999 (NYSEARCA:EWU).

The German DAX Index advanced 0.19 percent to 8,472 (NYSEARCA:EWG).  France’s CAC 40 Index rose 0.33 percent to 4,036 (NYSEARCA:EWQ).  Spain’s IBEX 35 Index declined 0.23 percent to 8,495 (NYSEARCA:EWP).  Italy’s FTSE MIB Index fell 0.45 percent to 17,427 (NYSEARCA:EWI).  3 Overseas Choices for Yield-Starved Investors

As of 3:15 EDT, the euro advanced 0.19 percent against the dollar, trading at $1.2906 (NYSEARCA:FXE).

Spain’s ten-year bond yield declined to 4.16 percent on Tuesday from Monday‘s closing level of 4.20 percent (NYSEARCA:EWP).  Spain’s two-year bond yield dipped to 1.67 percent on Tuesday from Monday‘s closing level of 1.69 percent (NYSEARCA:EWP).

Italy’s ten-year bond yield rose to 3.94 percent on Tuesday from Monday‘s closing level of 3.92 percent (NYSEARCA:EWI).

On London’s ICE Futures Europe Exchange, July futures for Brent crude oil  declined by $1.09 (1.04 percent) to $103.71/bbl. (NYSEARCA:BNO, NYSEARCA:USO).

June gold futures declined by $8.90 (0.64 percent) to $1,375.20 per ounce (NYSEARCA:GLD).

On China’s Shanghai Stock Exchange, stocks advanced on gains led by the solar sector.  The Shanghai Composite Index advanced 0.22 percent to 2,305 (NYSEARCA:FXI).  Hong Kong’s Hang Seng Index declined 0.54 percent to 23,366 (NYSEARCA:EWH).

In Japan, stocks made a modest advance as the yen remained at approximately 102.5 per dollar (NYSEARCA:FXY).  The plans announced by Prime Minister Shinzo Abe for what is referred to as the “third arrow” of his “Abenomics” program gave a boost to Kobe Steel and other stocks in the base metals sector.  The Nikkei 225 Stock Average advanced 0.13 percent to 15,381 (NYSEARCA:EWJ).  Forget Stocks, It Is the Japanese Yen That Is Moving Markets

American stock index futures were barely in positive territory ahead of Tuesday’s opening bell as investors anxiously awaited the testimony of Federal Reserve Chairman Ben Bernanke before the Joint Economic Committee on Wednesday.  The June 13 Dow Jones Industrials future climbed 0.12 percent to 15,338 as of 9:12 EDT.  The June 13 S&P 500 future rose 0.05 percent to 1,665 (NYSEARCA:SPY).  The June 13 Nasdaq 100 future advanced 0.09 percent to 3,023.

Bottom line:  European stocks made a slight retreat on Tuesday as investors began to question the ECB’s ability to fight the ongoing European recession. 

Global stock markets are in serious denial as markets climb while macro economic picture declines.

Last week, many observers of global stock markets were surprised to see global stock markets and European investors react with a wave of bullishness after Eurostat reported that the Eurozone was stuck in recession for a sixth consecutive quarter because its GDP contracted by 0.2 percent during the first quarter of 2013, despite expectations for a less-significant drop to negative 0.1 percent. 

Belief that the report would motivate the European Central Bank to step-up its efforts toward stimulating the European economy sent investors on a buying spree.  The first-quarter GDP for the 27-nation European Union contracted by 0.1 percent, which – after fourth quarter 2012 GDP contracted by 0.5 percent – brought the EU into recession with the Eurozone.  European investors were apparently mindful of the often-repeated reassurances from Super Mario Draghi that the ECB remains “ready to act again” if Eurozone economic conditions deteriorate beyond their currently-dismal state.

Eurostat’s GDP report indicated that Germany barely dodged economic recession as its first quarter GDP squeaked into positive territory by 0.1 percent, despite expectations that the German GDP reading would indicate expansion by 0.3 percent.

Because fourth quarter GDP for the Eurozone’s strongest economy was revised downward from negative 0.6 percent to negative 0.7 percent, we might find out in three months that Germany really has been in recession.  Despite the economic advance, a May 8 report from Markit Economics suggested that although Germany’s economy may have expanded during the first quarter, the second quarter has been signaling more contraction (NYSEARCA:EWG). 

Things look much the same in the United States as last week’s worse-than-expected drop in April industrial production was enthusiastically received by stock markets investors, who saw the bad news as justification for the Fed to reverse any earlier plans to taper back its quantitative easing program. 

The Federal Reserve’s report of a 0.5 percent decline in industrial production during April portrayed a situation worse than that seen by economists, who anticipated a less-significant decline by 0.2 percent.  Industrial production took its most significant drop in eight months.  Beyond that, manufacturing output dropped 0.4 percent in April after a decline of 0.3 percent in March.  The March and April, back-to-back declines marked the first time that manufacturing output fell for two consecutive months since 2009.

Despite economists’ expectations that the New York Federal Reserve’s Empire State Manufacturing Survey would increase to 3.75 in May from 3.05 in April, the report indicated that the general business conditions index fell more than four points to negative 1.4, further adding to the seemingly divergence between bad news and stock markets euphoria.

If recent grim economic reports had any impact on global stock markets, the only logical conclusion one could reach was that investors saw the bad news as a victory for the cause of eternal quantitative easing and defeat of any plans to “taper back” QE.  The Dow Jones Industrial Average (NYSEARCA:DIA) continues setting records on a near daily basis as bad news is considered good and good news is considered great.

The grim economic news continued all week and was accompanied by the same lack of investors’ concern for economic reality.  The Dow Jones Industrial Average managed to keep climbing in spite of last week’s disturbing jump in weekly initial unemployment claims to 360,000, the report on April housing starts and the Philadelphia Federal Reserve’s Business Outlook Survey for May, which sank from 1.3 in April to negative 5.2.

China’s economic slowdown has been documented by the HSBC China Services Business Activity Index, which dropped to 51.1 in April from 54.3 in March, for the weakest expansion of service sector activity since August 2011.  The April HSBC China Composite PMI (which covers both manufacturing and services) declined to 51.1 from 53.5 in March, indicating the weakest rate of expansion since last October.  The results were consistent with the government’s official manufacturing PMI result for April, which declined to 50.6 from the March reading of 50.9.  Worse yet, the HSBC Hong Kong PMI declined to a contractionary 49.9 in April from 50.5 in March.

The June 18 meeting of the Federal Reserve’s Federal Open Markets Committee (FOMC) could bring an interesting battle.  Last week, Philadelphia Federal Reserve president Charles Plosser remarked that he would advocate a plan to scale back the quantitative easing program.  Up until that time, Kansas City Federal Reserve President Esther George had been the only current FOMC member to enthusiastically speak out against QE.  Now that the Richmond Fed’s Jeffrey Lacker has finished his term as a sitting FOMC member, Esther George has taken up the crusade against QE.  On May 9, Dallas Federal Reserve President Richard Fisher pointed out that the lack of job creation is a result of poor fiscal policy rather than monetary policy.  Fisher explained that monetary policy had accomplished all it could in stimulating the economy and that ongoing bond buying by the Fed amounts to “overkill”. 

Richard Fisher’s statement was followed by Jon Hilsenrath’s May 10 Wall Street Journal  report (after the markets closed on that Friday afternoon) concerning a new strategy by the Federal Reserve to taper back its quantitative easing program.  The disclosure was carefully timed to give investors an opportunity to process the information and get used to the idea of life without quantitative easing before the next opening bell of the stock market.  Nevertheless,recent bullish trading activity demonstrates that investors are not only in denial about the lackluster economic recovery – they also have an alternative “plan B” denial mode to the effect that even if the economy is as bad as reports indicate, that situation would deter the Fed from taking away the punchbowl. 

This Wednesday’s release of the most recent FOMC meeting minutes, coupled with Fed Chairman Bernanke’s trek to Capitol Hill could provide stock market moving insights into the Fed’s future plans regarding its quantitative easing programs.

Meanwhile, for those global stock market investors who remain concerned that economic conditions could take their toll on stock prices, the following ETFs present opportunities to make profits as equities and the formerly-invulnerable “safe haven” of gold head south:

Ranger Equity Bear ETF (NYSEARCA:HDGE) – This ETF is designed to obtain capital appreciation through short sales of domestically-traded equity securities. The strategy for achieving its investment objective involves short selling a portfolio of liquid mid-cap and large-cap U.S. exchange-traded equity securities, ETFs, ETNs and other ETPs. 

ProShares Short Dow30 ETF (NYSEARCA:DOG) – This ETF is designed to obtain results which represent the inverse (-1x) of the daily performance of the Dow Jones Industrial Average. The fund invests in derivatives which ProShares Advisors believes should have similar daily return characteristics as the inverse of the daily return of the Dow Jones Industrial Average.

ProShares UltraShort Gold ETF (NYSEARCA:GLL) – This ETF is designed to provide daily investment results (before fees and expenses) that correspond to twice (200%) the inverse (opposite) of the daily performance of gold bullion as measured by the U.S. Dollar p.m. fixing price for delivery in London.

 Bottom line: Like an addict in search of his next fix, global stock markets are in denial over the possibility that the punchbowl of easy money might finally be taken away after all these years that have led to a serious form of financial addiction.  Although the Fed won’t go “cold turkey,” the addict might still find himself in serious withdrawal should even a small reduction in easy money become apparent.

The last full week of May began with disappointing economic news.  On Monday, the Chicago Federal Reserve released its National Activity Index for April.  The Chicago Fed National Activity Index (CFNAI) is a weighted average of 85 indicators of national economic activity drawn from four broad categories of data:

1) production and income; 2) employment, unemployment, and hours; 3) personal consumption and housing; and 4) sales, orders, and inventories.

A zero value for the index indicates that the national economy is expanding at its historical trend rate of growth; negative values indicate below-average growth; and positive values indicate above-average growth.

The April CFNAI indicated slower economic activity, with a decline to negative 0.53 from the March reading of negative 0.23.  Chicago Fed: Economic Activity Slower in April

From the report:

Led by declines in production-related indicators, the Chicago Fed National Activity Index (CFNAI) decreased to –0.53 in April from –0.23 in March. Three of the four broad categories of indicators that make up the index decreased from March, and none of the categories made a positive contribution to the index in April.  The index’s three-month moving average, CFNAI-MA3, ticked up to –0.04 in April from –0.05 in March. April’s CFNAI-MA3 suggests that growth in national economic activity was very near its historical trend. The economic growth reflected in this level of the CFNAI-MA3 suggests subdued inflationary pressure from economic activity over the coming year.

The CFNAI Diffusion Index increased to –0.03 in April from –0.04 in March. Thirty-two of the 85 individual indicators made positive contributions to the CFNAI in April, while 53 made negative contributions. Forty-four indicators improved from March to April, while 41 indicators deteriorated. Of the indicators that improved, eighteen made negative contributions.

Also on Monday, a report from the Department of Transportation spoke volumes about the lingering effects of the post-financial crisis economic slowdown.  Vehicle miles driven on roads and streets during March declined 1.5 percent when compared with March of 2012.  The report demonstrates that monthly totals of vehicle miles driven had been increasing steadily since late 1982 until mid-2008.  The monthly totals for vehicle miles driven have still not recovered from the levels experienced since late 2008.  As many Americans remain unemployed, the number of drivers on the road for their daily commute to work continues to remain in the range observed during 2009.  Can Dr. Ben Push Banks and Real Estate 12% Higher?

The major ETFs expected to respond to the Chicago Fed National Activity Index for April are:

Industrial Select Sector SPDR ETF (NYSEARCA:XLI):  +0.29%

iShares Dow Jones Industrial Sector Index ETF (NYSEARCA:IYJ):  +0.10%  Learn More About iShares ETFs

Materials Select Sector SPDR ETF (NYSEARCA:XLB):  +0.10%

iShares Dow Jones US Real Estate ETF (NYSEARCA:IYR):  -0.05%

iShares Russell 2000 Index ETF (NYSEARCA:IWM)  +0.16%

Bottom line:  Although the Chicago Fed National Activity Index indicated slower economic activity in April, the index’s three-month moving average suggested that growth in national economic activity was very near its historical trend. 

Investors started the week in a bullish mood despite unpleasant economic news, which sent the VIX climbing 4.58 percent.  The Chicago Fed National Activity Index (CFNAI), which is a composite of a number of indicators, dropped to negative 0.53 in April from negative 0.23 in March.  The disappointing report failed to restrain investors from sending the major stock indices to new record intraday highs, although by the closing bell only the Russell 2000 remained in record territory.

Despite its big advance on Monday, the VIX was unable to pop above its 50-day moving average of 13.35 at any point during the session, reaching only as high as 13.28.  Although the VIX made a few brief pops above its 50-day moving average on May 9 as well as Wednesday and Thursday of last week, those were the only three occasions when the VIX has been above its 50-day MA since falling below the 50-day MA on May 3.  Warning: 79% of S&P 500 Companies Issue Negative 2Q Guidance

The VIX finished Monday’s session with a 4.58 percent jump to 13.02, just short of its 50-day moving average of 13.35.  The VIX remained well above its previous closing level of 12.45 throughout the session, dropping only as low as 12.84.  The chart reveals that the 50-day moving average appears to be leveling off from its downward trajectory, although it remains below the 200-day moving average of 14.95.  The Relative Strength Index rose from Friday’s 44.44 to 48.43.  Both the MACD and the signal line continue to remain below the zero line, which usually signals a decline.  Is VIX Index Forecasting a Stock Market Surprise?

VIX ETF Update:

Volatility Index – New Methodology (VIX): Index:  13.02,  +4.58%,

iPath S&P 500 VIX Short-Term Futures ETN (NYSEARCA:VXX):  +1.33%, This ETN is designed to track volatility in the markets as measured by the Chicago Board Options Exchange Market Volatility Index (CBOE Index), a popular measure of the implied volatility of S&P 500 index options.

VelocityShares Daily 2X VIX Short-Term ETN (NYSEARCA:TVIX):  +2.38%, This ETN is designed to track 2X return on volatility in the markets as measured by the S&P 500 VIX Short-Term Futures Index.

iPath S&P 500 VIX Mid-Term Futures ETN (NYSEARCA:VXZ):  +1.19%, This ETN is designed to track volatility in the markets as measured by the CBOE Volatility Index futures contracts.

S&P 500 Dynamic VIX ETN (NYSEARCA:XVZ):  +0.50%, This ETN is designed to track volatility in the markets as measured by the S&P 500 Dynamic VIX Futures Total Return Index.

Velocity Shares Daily Inverse VIX Short-Term ETN (NYSEARCA:XIV):  -1.26%, This ETN is designed to inversely track the volatility in the markets as measured by the S&P 500 VIX Short-Term Futures Index.

Bottom line:  Although the disappointing Chicago Fed National Activity Index did little to restrain investor enthusiasm on Monday, it fueled stock market volatility by sending the VIX soaring by 4.58 percent. 

I’ve always thought that an “emerging markets” ETF consisting of only U.S. or developed-market companies that get a bulk of their revenues from emerging markets would resonate with investors—in essence, a “developed-companies, emerging markets ETF.”

That’s exactly what MSCI and Russell are aiming to tackle in their relatively new economic and geographic exposure indexes. In short, these new indexes target a specific country or region not based on where the company is domiciled or listed, but on the company’s revenue source.

Not much has been discussed about these indexes, nor do many folks yet know that they even exist, but I think MSCI and Russell are on to something new and potentially big here.

In an increasingly global financial market, more multinationals are getting a majority of their revenues from outside their own borders. For example, from a brand-name perspective, Coca-Cola is as American as apple pie. But from a revenue perspective, it’s not as clear, with the soft drink company getting more than half its revenue from outside the United States.

In an extreme case, Nestle gets less than 5 percent of its revenues from Switzerland, but gets 35 percent of its revenues from emerging markets, according to MSCI. Does it still make sense for Nestle to be only included in the MSCI Switzerland index?

The list goes on. Think of companies like Unilever, McDonald’s, Yum Brands, Nike, Estee Lauder, Pepsi and Adidas. While there have been numerous debates surrounding country classification (e.g., South Korea), little has been talked about regarding whether investors are truly getting complete exposure to emerging markets.

This is especially true in the consumer space.

Emerging-markets-consumer ETFs are gaining in popularity—for example, the EGShares Emerging Markets Consumer ETF (NYSEArca: ECON) is now a $1.1 billion fund. Still, the truth is, many of the top consumer brands in emerging markets are no longer necessarily local companies.

As emerging markets consumers gain more purchasing power, consumers are increasingly choosing “foreign” brands as a status symbol, if not because of the “cool” factor, especially with the younger generation. The sporting goods sector in China is a case in point. Nike and Adidas have long surpassed local brands in China in terms of revenues.

The Indexes

MSCI first launched its economic-exposure indexes in March 2012, starting off with five developed-market benchmarks targeting emerging markets exposure, including the MSCI World with EM Exposure Index and MSCI USA with EM Exposure Index.

Since then, the indexing juggernaut has launched 13 more, included indexes targeting Asia, China and Africa, as well as a comprehensive emerging markets index that pulls from both developed and emerging markets, the MSCI ACWI with EM Exposure Index.

To determine a company’s economic exposure, MSCI considers a company’s emerging markets multiplier—based on the proportion of the GDP weight of emerging countries relative to the region as a whole—and the percent of revenues from the region.

Meanwhile, Russell first launched its GeoExposure Indices in September 2012. Russell currently has four indexes targeting emerging markets exposure from developed-market indexes, including the Russell 1000 EM GeoExposure Index.

Russell determines a company’s economic exposure to a region by incorporating both the total revenues in dollar terms and the percentage of revenues, derived from the region. It then determines a composite score based on a weighted average of the following: percentage of revenues (50 percent); revenues in dollar terms (25 percent); and market cap (25 percent).

Concluding Thoughts

Whether these indexes take off is yet to be seen, but they certainly open up a new angle regarding what constitutes total emerging markets exposure. At the least, I think it’s a good time for investors to start thinking about corporate revenues in a globalized world.

After all, from a purely exposure perspective, does it matter where the company is domiciled if a significant chunk of their revenues are from emerging markets? Shouldn’t these types of companies carry some weight in an enhanced EM index?

For example, the MSCI ACWI with EM Exposure Index looks particularly attractive in this arena, as it doesn’t limit itself to emerging or developed-country classifications, but simply measures the revenue exposure to emerging markets of all global companies.

Indexing is certainly evolving, and I wonder if one day these types of indexes could be the next-generation market-cap weighted indexes. There are currently no filings from ETF issuers to track these new benchmarks, but it wouldn’t surprise me to see a few in the near future.

At the time this article was written, the author had no positions in the securities mentioned. Contact Dennis Hudachek at dhudachek@indexuniverse.com.

Unpleasant economic news failed to dampen investor enthusiasm on Monday.  The Chicago Fed National Activity Index (CFNAI), which is a composite of a number of indicators, dropped to negative 0.53 in April from negative 0.23 in March.  The bad news failed to restrain investors from sending the major stock indices to new record intraday highs, although by the closing bell only the Russell 2000 remained in record territory.

The Dow Jones Industrial Average (NYSEARCA:DIA) lost 19 points to finish Monday’s trading session at 15,335 for a 0.12 percent decline.  The Dow reached a new record intraday high of 15,391.84.  The S&P 500 (NYSEARCA:SPY) finished Monday’s session with a 0.07 percent dip to 1,666.  The S&P reached a new record intraday high of 1,672.84.  The big question at this point is whether the S&P 500 will reach 1,700.

The Nasdaq 100 (NASDAQ:QQQ) declined 0.26 percent to 3,020.  The Russell 2000 (NYSEARCA:IWM) advanced 0.17 percent to a new record-high close of 997.98 after breaking through the 1,000 barrier to hit an intraday record high of 1,001.50.

In other major markets, oil (NYSEARCA:USO) advanced by 0.67 percent to close at $34.44.

On London’s ICE Futures Europe Exchange, July futures for Brent crude oil  advanced by 18 cents (0.17 percent) to $104.82/bbl. (NYSEARCA:BNO).

June gold futures advanced by $28.10 (2.06 percent) to $1,392.80 per ounce (NYSEARCA:GLD).

Read “Are Oil ETFs Still on the Move?”

Transports stalled-out on Monday, with the Dow Jones Transportation Index (NYSEARCA:IYT) declining 0.67 percent.

European stocks had another strong day on Monday as a result of Morgan Stanley’s bullish outlook on the European automotive sector (NYSEARCA:VGK).  The firm raised its recommendation on the region’s automobile manufacturers from “neutral” to “overweight” (NYSEARCA:VGK).  The Euro STOXX 50 Index finished Monday’s trading session with a 0.23 percent advance to 2,824 – remaining above its 50-day moving average of 2,688 (NYSEARCA:FEZ).

Read “European Stocks Accelerate on Monday”

In Japan, stocks advanced on rumors that the nation will restart its nuclear power plants, raising investor confidence that the nation will no longer require expensive fuel imports, which have become more costly due to the weakened yen.  The Nikkei 225 Stock Average jumped 1.47 percent to 15,360 (NYSEARCA:EWJ).

In China, stocks advanced on volume in excess of 50 percent of the 30-day average as the government continued to institute reforms in accordance with Premier Li Keqiang’s efforts to cut administrative red tape.  Monday’s announcement that projects for airports and gas fields will no longer need pre-approval boosted investor enthusiasm.  The Shanghai Composite Index jumped 0.77 percent to 2,299 (NYSEARCA:FXI).  Hong Kong’s Hang Seng Index skyrocketed 1.78 percent to 23,493 (NYSEARCA:EWH).

Technical indicators reveal that the S&P 500 remains far above its 50-day moving average of 1,584 after closing at 1,666.26 – as bears continue to hope that we are watching the formation of a head-and-shoulders pattern, which would signal a decline.  Its Relative Strength Index dipped from 72.24 to 71.85 – remaining above the threshold level of 70, which most investors consider an “overbought” signal.  Both the MACD and the signal line continue soaring above the zero line, suggesting the likelihood of a further advance.

Read “How to Create a Do-It-Yourself Fund for Diversification”

For the day, sectors were evenly mixed, with the energy sector advancing beyond one percent while the consumer staples sector declined by just over one percent.

Consumer Discretionary (NYSEARCA:XLY):  -0.30%

Technology:  (NYSEARCA:XLK):  (unchanged)

Industrials (NYSEARCA:XLI):  +0.29%

Materials: (NYSEARCA:XLB):  +0.10%

Energy (NYSEARCA:XLE):  +1.41%

Financials: (NYSEARCA:XLF):  +0.20%

Utilities (NYSEARCA:XLU):  -0.50%

Health Care: (NYSEARCA:XLV):  -0.69%

Consumer Staples (NYSEARCA:XLP):  -1.03%

Bottom line:  The downbeat Chicago Fed National Activity Index did little to dampen investor enthusiasm on Monday as the Dow, S&P 500 and Russell 2000 indices reached new record intraday highs.     

European stocks had another strong day on Monday as a result of Morgan Stanley’s bullish outlook on the European automotive sector (NYSEARCA:VGK).  The firm raised its recommendation on the region’s automobile manufacturers from “neutral” to “overweight”.  In the troubled nation of France, the share price for Peugeot jumped by nearly 6 percent (NYSEARCA:EWQ).

The Euro STOXX 50 Index finished Monday’s trading session with a 0.23 percent advance to 2,824 – remaining above its 50-day moving average of 2,688.  So far, the STOXX 50 has been above 2,700 throughout the month of May.  Its Relative Strength Index is 68.13.  Most investors consider an RSI above 70 as an “overbought” signal (NYSEARCA:FEZ).  The FTSE 100 Index climbed 0.48 percent to 6,755 (NYSEARCA:EWU).

The German DAX Index advanced 0.69 percent to 8,455 (NYSEARCA:EWG).  France’s CAC 40 Index rose 0.54 percent to 4,022 (NYSEARCA:EWQ).  Spain’s IBEX 35 Index sank 0.78 percent to 8,515 (NYSEARCA:EWP).  Italy’s FTSE MIB Index declined 0.56 percent to 17,506 (NYSEARCA:EWI).

As of 3:28 EDT, the euro declined 0.41 percent against the dollar, trading at $1.2892 (NYSEARCA:FXE).

Spain’s ten-year bond yield declined to 4.19 percent on Monday from Friday‘s closing level of 4.21 percent (NYSEARCA:EWP).  Spain’s two-year bond yield fell to 1.66 percent on Monday from Friday‘s closing level of 1.69 percent (NYSEARCA:EWP).

Italy’s ten-year bond yield declined to 3.91 percent on Monday from Friday‘s closing level of 3.94 percent (NYSEARCA:EWI).

On London’s ICE Futures Europe Exchange, July futures for Brent crude oil  advanced by 3 cents (0.03 percent) to $104.67/bbl. (NYSEARCA:BNO, NYSEARCA:USO).  Are Oil ETFs On the Move?

June gold futures advanced by $27.50 (2.02 percent) to $1,392.20 per ounce (NYSEARCA:GLD).

In China, stocks advanced on volume in excess of 50 percent of the 30-day average as the government continued to announce reforms in accordance with Premier Li Keqiang’s efforts to cut administrative red tape.  Monday’s announcement that projects for airports and gas fields will no longer need pre-approval boosted investor enthusiasm.  The Shanghai Composite Index jumped 0.77 percent to 2,299 (NYSEARCA:FXI).  Hong Kong’s Hang Seng Index skyrocketed 1.78 percent to 23,493 (NYSEARCA:EWH).

In Japan, stocks continued to advance after Prime Minister Shinzo Abe discussed more plans for what is referred to as the “third arrow” of his “Abenomics” program.  Although Abenomics is commonly associated with the Prime Minister’s efforts to pressure the Bank of Japan to step-up its monetary easing efforts, the plan also involves fiscal stimulus as well as structural reform programs. The plan now involves doubling farm exports and tripling infrastructure exports by 2020.  The government will also increase private sector investment by ten percent to 70 trillion yen.

Rumors that Japan will restart its nuclear power plants raised investor confidence that the nation will no longer require expensive fuel imports, which have become more costly due to the weakened yen.  The Nikkei 225 Stock Average jumped 1.47 percent to 15,360 (NYSEARCA:EWJ).  The Lesson from Japan’s Stock Market

American stock index futures were in negative territory ahead of Monday’s opening bell as investors remained worried about what the Chicago Federal Reserve’s National Activity Index (CFNAI) might indicate.  The June 13 Dow Jones Industrials future dipped 0.10 percent to 15,299 as of 9:14 EDT.  The June 13 S&P 500 future declined 0.12 percent to 1,661 (NYSEARCA:SPY).  The June 13 Nasdaq 100 future fell 0.22 percent to 3,016.

Bottom line:  The European stock market continued to shock observers as the region’s major stock indices resumed their advance despite last week’s report of deepening recession in the Eurozone which expanded to the greater, 27-nation European Union. 

In Japan, stocks made a surprisingly modest advance on Friday, after Prime Minister Shinzo Abe attracted a good deal of publicity from his “release” of what is referred to as the “third arrow” of his “Abenomics” program.  Although Abenomics is commonly associated with the Prime Minister’s efforts to pressure the Bank of Japan to step-up its monetary easing efforts, the plan also involves fiscal stimulus as well as structural reform programs, some of which were unveiled on Friday.  The plan now involves doubling farm exports and tripling infrastructure exports by 2020.  The government will also increase private sector investment by ten percent to 70 trillion yen.

The Nikkei 225 Stock Average rose by a mere 0.67 percent to 15,138 at the end of Friday’s trading session.  We have become accustomed to watching the Nikkei 225 make more robust surges – sometimes well in excess of two percent – when announcements or even expectations of monetary stimulus efforts are in the news.

The Bank of Japan’s devaluation of the yen helped boost the nation’s exports during the first quarter of 2013.  Japan’s Cabinet Office reported on Thursday that the nation’s GDP expanded by 0.9 percent during the first quarter, beating economists’ expectations of 0.7 percent growth.  At an annualized rate, GDP grew by 3.5 percent, beating economists’ expectations of 2.7 percent growth.  The result raised fears that the market may be overheating.

Despite fears that a weaker yen would inhibit consumer spending, Japanese private consumption jumped by 0.9 percent during the first quarter.  Many analysts have attributed the increased spending to the rise in stock prices, in other words: the “wealth effect”.  On the other hand, the weakened yen caused the nation’s annual trade deficit to jump to a record high of 8.17 trillion yen for the year ending on March 31.

On Monday, May 13, the G-7 finance ministers announced – after their weekend meeting in Britain – that they had no objection to further weakening of the yen.  The exchange rate for the yen is now below a penny, trading at approximately 102 yen per dollar (NYSEARCA:FXY).  Good News for Forex Traders

A good deal of commentary has focused on the notion that Prime Minister Abe will be unable to implement the specific reforms, referred to as the “third arrow” of Abenomics unless Mr. Abe wins enough support by way of the Upper House elections in July.

The anticipated “third arrow” reforms include: improvements which will allow Japan’s medical care industry to expand on a global basis.  Japan’s healthcare system currently provides incentives for physicians to overprescribe drugs, to over-extend patient hospital stays and to treat as many patients as possible during any given day.

Changes to the nation’s energy policy have been proposed, which will include measures to reduce greenhouse gas emissions.  The housing market has been targeted for a number of reforms, including a crackdown on substandard construction practices.  Plans for an expanded childcare support policy will facilitate increased participation of women in the workplace.  Buy Into the Only Real Economy Left in the World

The chart below depicts the performance of the iShares MSCI Japan Index ETF (NYSEARCA:EWJ) during the past 180 days.  (Chart courtesy of Stockcharts.com.)

The steady climb has taken place in conjunction with the weakening of the yen. The April 1 nosedive demonstrated how a strengthening yen is the biggest threat to the Japanese stock market.  The yen strengthened because the euro declined in anticipation of a dreadful report on Eurozone unemployment, which was due on the following day.  On the other hand, we saw yen weakness take its toll on stock prices, as demonstrated by the dip on April 18.  Investors were obviously concerned about a report that the nation’s annual trade deficit expanded by over 400 percent to a record high (from April 1, 2012 through March 31, 2013).

The Relative Strength Index is now at 69.28, approaching the threshold level of 70, which many investors consider an “overbought” signal.  The MACD and the signal line have been enmeshed in a braided pattern for nearly the entire month of May at the 0.24 level.

Japan ETF Update:

iShares MSCI Japan Index Fund ETF (NYSEARCA:EWJ):  +1.59%, This ETF is designed to track the performance of the MSCI Japan Index.  The MSCI Japan Index tracks Japanese stock market performance as reflected by the performance of top companies and sectors in Japan including Toyota, Mitsubushi, Canon, and Honda.  Learn More About iShares ETFs

MAXIS Nikkei 225 Index ETF (NYSEARCA:NKY):  +1.53%, This ETF seeks investment results that correspond to the performance of the Nikkei Stock Average by investing at least 80% of its assets in the securities in the  Nikkei 225 stock index . The Nikkei 225, which is published by Nikkei Inc., measures the performance of 225 highly liquid stocks traded on the large cap or “first” section of the Tokyo Stock Exchange.

WisdomTree Japan Hedged Equity ETF (NYSEARCA:DXJ):  +2.02%, This ETF is designed to track the price and yield performance, before fees and expenses, of the WisdomTree Japan Hedged Equity Index. The fund employs a “passive” – or indexing – investment approach designed to track the performance of the WisdomTree Japan Hedged Equity Index. It attempts to invest substantially all of its assets in the common stocks that make up the index. The fund is non-diversified.

CurrencyShares Japanese Yen Trust ETF (NYSEARCA:FXY):  -0.92%, This ETF is designed to track the performance of the Japanese Yen.  The CurrencyShares Japanese Yen Trust ETF (NYSEARCA:FXY) is a trust denominated in Japanese Yen, and the depository bank is JP Morgan Chase Bank, N.A. London Branch.

Bottom line:  As Japanese Prime Minister Shinzo Abe attracts a good deal of publicity with his “release” of the “third arrow of Abenomics”, that arrow will not fly unless Mr. Abe can win enough support for the program from Japan’s Upper House after the July elections. 

For the week, the U.S. stock market and its major indexes, the Dow Jones Industrial Average (NYSEARCA:DIA) and S&P 500 (NYSEARCA:SPY) set new all time highs again in the face of poor economic news and weak earnings reports.

For the week, the Dow Jones Industrial Average (NYSEARCA:DIA) rose 1.6% and the S&P 500 (NYSEARCA:SPY) gained 2%. The Nasdaq (NYSEARCA:QQQ) added 1.8% for the week.

All major indexes remain overbought and in record territory according to several technical indicators.

 On My ETF Radar

chart courtesy of StockCharts.com

In the chart of the S&P 500 (NYSEARCA:SPY), we can see how the index has returned to overbought territory with RSI above 70 and the index now far above its 50 and 200 day moving averages.

This major stock market index is now 12.8% above its 200 day moving average, an extreme not seen since March, 2000, just before the onset of the dot-com crash.  Margin interest is near record highs and earnings have been mediocre, at best, and in recent days various Fed officials have been hinting that a step back from quantitative easing could be coming soon.

All of this adds up to a continued high risk environment for the stock market in an overbought, bubbly environment.

 ETF News You Can Really Use

Economic reports were mixed last week as retail sales grew 0.1%, beating expectations and consumer sentiment and leading indicators rose on Friday.

However, the negative news far outweighed the positive as weekly jobless claims unexpectedly spiked higher, the Empire Index fell into negative territory, vastly missing expectations, industrial production declined, also missing expectations, and the Philly Fed took a sharp tumble into negative territory.  Reports from Europe indicated that the Eurozone recession is deepening with nine of seventeen countries in recession.  The European economy fell 0.2% in the first quarter and now has been in recession for six straight quarters.  Even powerhouse Germany managed to just barely stay out of recession with a gain of 1/10% in the first quarter.

Earnings reports did little to add cheer as Dell Computer was hit with a 79% drop in earnings, JC Penny reported a $350 million loss in its first quarter and Walmart saw same store sales dropping and earnings missing expectations as consumers hunkered down in the face of ongoing high employment and higher payroll taxes.

Next week brings some important economic reports but the big headlines will come on Wednesday when the Federal Reserve’s meeting minutes are released.  A recent stream of comments from Fed Presidents that the Federal Reserve should start backing off on quantitative easing could be setting the stage for some unsettling comments in the upcoming minutes.  Market participants will be keeping a close eye on Fed Chairman Bernanke’s testimony to Congress on Wednesday for hints over the future of quantitative easing and the Fed’s future plans.

Numerous analysts and commentators have agreed that the recent rally is largely based on easy money supplied by the Fed and that investor reaction to removal of the “punch bowl” could be highly negative.

Other important rep0rts will be weekly job claims, Markit PMI and new home sales on Thursday and durable goods orders on Friday.

Bottom line:  The stock market bubble grows bigger as investors continue to believe that the Federal Reserve will not cut back on its quantitative easing programs, even as warnings emerge.  Coupled with overbought conditions and a slowing global economy, the stock market remains in a vulnerable situation.

Oil ETFs and Energy ETFs have steadily risen in the last few weeks, only to have finished on the positive side of flat this past week.  The oil spot price lost .15% to close at $95.85 for the week, while the United States Oil Fund ETF (NYSEARCA:USO) added .21% for the week and the United States 12 Month ETF Fund (NYSEARCA:USL) rose .54% for the week.

Oil ETFs and Energy ETFs likely finished mixed this week due to disappointing economic news, especially in unemployment numbers.  Contracting economies typically use less energy, so it is not surprising that a decrease in unemployment claims this past week would hamper energy ETF prices.  Additionally, the Philly Fed Business Outlook Survey and the Commerce Department’s Initial Home Starts Report for April indicated further weakness for the US economy, likely driving energy demand down and thus pushing oil ETF and energy ETF prices down with it.  Click here to read more about America’s dismal economic reports last week.

From a technical perspective, oil ETFs have risen above their respective 50 and 200 moving day averages over the past few weeks, despite last week’s plateau.  Additionally, the United States Oil Fund ETF (NYSEARCA:USO) has an increasing RSI of 53.27 and a positive MACD of .087, which suggests rising action ahead for NYSEARCA:USO and other oil ETFs.  Although last week’s economic news was not so bright, oil ETFs and energy ETFs will likely continue to rise so long as the US economy does not fall.

Oil ETF Update: 

Oil Spot Price: $95.85/barrel, -.15%

United States Oil Fund LP ETF (NYSEARCA:USO):  +.21%, This ETF is a commodity based ETF designed to track the price of West Texas Intermediate Crude Oil.  The United States Oil Fund LP ETF (NYSEARCA:USO) reflects the price of oil delivered to Cushing, Oklahoma and is traded as futures contracts on The New York Mercantile Exchange (NYMEX).

United States 12 Month Oil Fund LP ETF (NYSEARCA:USL):  +.54%, This ETF is a commodity based ETF designed to track the price of West Texas Intermediate Crude Oil.  The United States 12 Month Oil Fund LP ETF (NYSEARCA:USO) reflects the price of oil delivered to Cushing, Oklahoma and reflects the average of the next 12 months of oil futures contracts on The New York Mercantile Exchange (NYMEX).

Natural Gas ETF Update:

Natural Gas Spot Price: $4.05/ft³, +3.21%

United States Natural Gas Fund LP ETF (NYSEARCA:UNG): +3.40%, This ETF is a commodity based ETF designed to track the price of Natural Gas delivered to Henry Hub, Louisiana.  The United States Natural Gas Fund LP ETF (NYSEARCA:UNG) is traded as futures contracts on The New York Mercantile Exchange (NYMEX).

Energy ETF Update:

Energy Select Sector SPDR Fund ETF (NYSEARCA:XLE): +2.30%, This ETF tracks the performance of the S&P Energy Select Sector Index.  The S&P Energy Select Sector Index closely tracks companies within the S&P 500’s Energy Sector, including oil, gas, and energy equipment companies.

iShares Trust Dow Jones United States Energy ETF (NYSEARCA:IYE): +2.23%, This ETF tracks the performance of US Energy Stocks in the Dow Jones US Oil & Gas Index.  The Dow Jones US Oil & Gas Index closely tracks oil and gas producers within the energy sector of the US Equities Market.

Bottom Line:  Energy ETFs and oil ETFs continue to rise despite meager economic news last week.  With technical indicators looking strong however, oil ETFs and energy ETFs will likely continue to rise.

After a recent review of the almost 200 fixed-income ETFs traded in the U.S., a stark reality hit me: Issuers have been slicing and dicing the fixed-income market ever-more granularly, but nobody has yet offered a marketlike investment-grade global bond fund.

Only BlackRock has a fund in registration to track the Barclays Global Aggregate Bond Index, but with no ticker or expenses reported in the filing, the imminence of a launch is unlikely.

Many investors have traditionally stayed U.S. focused, typically investing in a fund seeking to either track or beat the Barclays U.S. Aggregate Bond Index and leaving it at that.

But this is short sighted, as dollar-denominated debt no longer constitutes the majority of the outstanding investment-grade debt. In fact U.S.-dollar debt makes up about 40 percent of the Barclays Global Aggregate Bond Index, compared with 67 percent 20 years ago.

So what does it take to go global with ETFs in the current landscape?

The U.S. exposure seems pretty straightforward. Four funds deliver exposure to the Barclays U.S. Aggregate Bond Index:

• iShares Core Total U.S. Bond Market ETF (NYSEArca: AGG)
• Vanguard Total Bond Market ETF (NYSEArcca: BND)
• SPDR Barclays Aggregate Bond ETF (NYSEArca: LAG)
• Schwab U.S. Aggregate Bond ETF (NYSEArca: SCHZ)

AGG’s superior liquidity and lowest all-in cost—expenses, tracking and trading costs—edge out the competition. Still, these differences are typically a matter of single-digit basis points. In other words, any of the three funds should get the job done.

From here a combination of the SPDR Barclays International Treasury Bond ETF (NYSEArca: BWX) and the SPDR Barclays International Corporate Bond ETF (NYSEArca: IBND) will push you over the top to get you something approximating truly global exposure.

These two funds cost 50 basis points and 55 basis points, respectively, which is at least 10 times the cost of SCHZ, which comes in a at 5 basis points. Similarly, both funds have more tracking variability than the funds tracking the U.S. Aggregate. While both have decent volume and reasonable bid/ask spreads to meet investor needs, neither affords investors the same liquidity as AGG or BND.

None of this should be a surprise, since the funds target segments of the bond market that are less liquid and harder to track. However, that relative lack of liquidity does translate to higher trading costs incurred by establishing the correct proportions you need to hold the three funds to get marketlike exposure and then maintaining it with regular rebalances.

Vanguard will partially solve this problem when it finally launches the Vanguard International Bond Index Fund. Despite being late to the game in launching an international bond fund, the name brand and the low cost are likely attract assets. The reason it’s not a complete solution is the fund will be hedging out the currency exposure of its nondollar bond portfolio.

The debate for and against hedged versus un-hedged exposure is a subject for another blog on another day, but the takeaway should be that the Vanguard fund will be a particular flavor of broad international bond exposure, and investors should keep this in mind before diving in head-first.

Regardless of your opinion about taking on currency risk with your international bond exposure, not taking a global approach misses a significant part of the market that can help diversify your exposure. Until an issuer solves this hole in coverage, investors are stuck getting their global bond exposure in a piecemeal way.

At the time this article was written, the author held no positions in the securities mentioned. Cotact Gene Koyfman at ykoyfman@indexuniverse.com.

In the past week, the world has seen an onslaught of rate cuts. The latest cuts follow the lead of most major central banks, which have pursued ultra-easy monetary policy since the financial crisis struck five years ago.

Rate cuts have been standard monetary policy for stimulating short-term growth for decades. However, historically, rates have not been cut to such low levels as they have in recent years

So, some central banks—the Federal Reserve, the European Central Bank and the Bank of Japan—which can’t cut further because rates are already near zero, have engaged in quantitative easing, the by-now household word for rampant bond buying that is designed to keep official borrowing rates low by pushing yields on benchmark fixed-income securities ever lower.

This is all well and good for those of a Keynesian persuasion, but for monetarists and sound money advocates in general, the actions of the Fed, the ECB and the BOJ are at best irresponsible and, at worst, malignant.

The “growth-at-all-costs” agenda has made many investors, including myself, concerned about the future and, in particular, about the value of the U.S. dollar. It’s not that I think the dollar is doomed, it’s just that quantitative easing is a monetary experiment, and I’d prefer it if my retirement account weren’t the laboratory.

But just as this play is about to turn from bad to worse, a new player enters the scene: the Pimco Foreign Currency Strategy ETF (NYSEArca: FORX).

FORX is actively managed with a stated objective to provide exposure to foreign currencies that are likely to outperform the dollar over the long term. It has an annual expense ratio of 0.65 percent.

To accomplish that objective, Pimco evaluates “relative interest rates, inflation rates, exchange rates, monetary and fiscal policies, trade and current account balances, legal and political developments, and other specific factors.”

Notably absent from FORX’s current portfolio are the euro, the yen and the British pound. Those three currencies are the most heavily traded in the world, apart from the dollar, which is excluded by design.

It’s no coincidence that those four currencies are also the ones that have “eased” the most, in terms of rate cuts and asset purchases.

The basic point is that investors are increasingly skeptical of central bank actions, especially as the theories behind central bank asset purchases become more convoluted. So, FORX is comfort food for U.S., Japanese and European equity investors.

After all, you don’t need a Ph.D. in economics to understand Milton Friedman’s basic equation of exchange: MV=PQ (Money Supply * Velocity of Money = Price Level * Real Output).

According the basic equation, if you increase the money supply and hold velocity constant, you’ll either increase real output or the price level. If it were possible to increase real output simply by printing money, Zimbabwe and Hungary—two of the worst cases of inflation, ever—would be the prosperity capitals of the world.

The chart below goes a long way toward rationalizing skepticism of the Federal Reserve’s actions.

Since we’ve had hardly any semblance of inflation in the U.S., some “experts” declare that the skepticism is unwarranted. The red line shows the expansion in the money supply since 1995, while the blue line depicts the decline in the velocity of money.

Source: Federal Reserve Bank of St. Louis

The basic conclusion is simple: If the rate at which money changes hands—velocity—increases from its current all-time lows, either real output or price levels will increase. An increase in price levels is inflation; inflation is the great detractor of wealth.

But you don’t need to be of the doom and gloom mentality to be a believer in Pimco’s FORX.

Simply put, if you’re anything less than highly confident that the monetary experiments currently being conducted will be successful, there could be room for FORX in your portfolio.

FORX, as I noted above, is an actively managed portfolio, so it’s difficult to make forward-looking presumptions of which currencies the portfolio will hold.

But, currently, it’s avoiding currencies with the easiest monetary policy and those with the highest levels of government debt relative to GDP. That seems rational.

So what does FORX hold?

The portfolio consists of large positions in the Canadian dollar, the Russian ruble, the Norwegian krone, the Mexican peso, the Brazilian real and the Swedish krona.

Many of those are considered to be “commodity currencies.” Storable commodities tend to preserve their real value even in the face of inflation, so the currencies of economies most dependent on commodity production should fare well in an inflationary environment.

FORX portfolio managers have a range of tools to gain exposure to foreign currencies: The fund’s strategy allows the purchase of currencies in the spot market, short-term fixed-income securities, money market securities and currency forwards.

Although it holds fixed-income securities, the fund hews tightly to its currency mandate and has a muted effective duration of less than half a year, which keeps the fund focused tightly on currency and exchange-rate risk as opposed to interest-rate risk.

The fund has only been on the market for a little over three months, but it has accumulated over $26 million in assets and could become wildly popular if domestic inflation ticks upward.

Ultimately, you don’t need to be a naysayer to be skeptical of monetary policies in some of the world’s largest economies. FORX investors stand to benefit from a decline in the U.S. dollar.

The dollar has exhibited strength recently, and the immediate- to short-term outlook for the U.S. dollar appears strong, so the time for FORX may not be today.

However, if you wait until you’re eye-to-beak with a black swan, it might be too late.

At the time this article was written, the author held no positions in the securities mentioned. Contact Spencer Bogart at sbogart@indexuniverse.com.

Investors got a pleasant surprise on Tuesday morning from the National Federation of Independent Business.  Economists had been expecting to see the NFIB Small Business Optimism Index advance from 89.5 in March to 90.5 in April.  Instead, the index jumped above the recovery average of 90.7 to 92.1.  Checking in on the WSJ Economists’ Forecasts for GDP

From the report:

After last month’s disappointing drop in small-business confidence, April’s Index of Small Business Optimism rose 2.6 points to 92.1, just above the recovery average of 90.7. In April’s report, four Index components rose, two fell and four were unchanged. Yet pessimism abounds within the sector, as still far more of those surveyed expect business conditions to be worse in six months than those who think they will be better. 

*   *   *

Owners were asked to identify their top business problem: 23 percent cited taxes, 21 percent cited regulations and red tape and 16 percent still cited weak sales. Only 2 percent reported financing as their top business problem. A quarterly break-out of top business problems by sector will be released next Tuesday. 

Also on Tuesday, the Federal Reserve Bank of New York released its Household Debt and Credit Report for the first quarter of 2013.  The report disclosed that outstanding household debt decreased by $110 billion, or 1.0 percent, primarily because people were paying down credit card balances.  US Industrial Production: April 2013 Preview

From the report:

Outstanding household debt declined approximately $110 billion from the previous quarter, due in large part to a reduction in housing-related debt and credit card balances.  Meanwhile, delinquency rates for each form of household debt declined, with about 8.1 percent of outstanding debt in some stage of delinquency, compared with 8.6 percent the previous quarter. The Quarterly Report is based on data from the New York Fed’s Consumer Credit Panel, a nationally representative sample drawn from anonymized Equifax credit data.

In Q1 2013 total household indebtedness fell to $11.23 trillion, 1.0 percent lower than the previous quarter and considerably below the peak of $12.68 trillion in Q3 2008.

Delinquency rates improved across the board: mortgages (5.4 percent from 5.6 percent), HELOC (3.2 percent from 3.5 percent), auto loans (3.9 percent from 4.0 percent), credit cards (10.2 percent from 10.6 percent) and student loans1(11.2 percent from 11.7 percent).  The overall 90+ day delinquency rate dropped from 6.3 percent to 6.0 percent this quarter, below the 8.7 percent peak from three years ago.

The major ETFs expected to respond to the April Small Business Optimism Index and the First Quarter Household Debt and Credit Report from the New York Fed are:

Industiral Select Sector SPDR Fund ETF (NYSEARCA:XLI):  +1.23%

Consumer Staples Select Sector SPDR ETF (NYSEARCA:XLP):  +1.19%

Consumer Discretionary Select Sector SPDR ETF (NYSEARCA:XLY):  +1.02%

SPDR S&P Retail ETF (NYSEARCA:XRT):  +1.54%

iShares Russell 2000 Index ETF (NYSEARCA:IWM):  +1.28%  Learn More About iShares ETFs

Bottom line:  The April Small Business Optimism Index revealed that small business owners have improved their outlook about business conditions, with the index rising above the recovery average of 90.7 to reach 92.1.

Stock market volatility increased on Tuesday, despite the better-than-expected reading of 92.1 from the Small Business Optimism Index for April.  The result was above the recovery average of 90.7, beating economists’ expectations of an advance from 89.5 in March to 90.5 in April.  The VIX made a significant jump, despite the fact that the S&P 500 reached a new intraday record high of 1,651.10.  The S&P also set a new record-high close at 1,650.34.  What Monday’s Weak Breadth Could Foreshadow

The VIX continues to remain below its 50-day moving average, as it has since May 3, although it briefly popped above the 50-day MA on May 9, before declining.  The VIX finished Tuesday’s session with a 1.75 percent advance to 12.77 after climbing as high as 13.21 – just short of the 50-day moving average of 13.37.  The chart reveals that the 50-day moving average appears to be leveling off from its downward trajectory, remaining below the 200-day moving average.  Its Relative Strength Index advanced from Monday’s 44.79 to 46.18.  Both the MACD and the signal line are continuing their trajectory below the zero line, which usually signals a further decline.  Stocks Could Continue Surprising Ascent

VIX ETF Update: 

Volatility Index – New Methodology (VIX): Index:  12.77,  +1.75%,

iPath S&P 500 VIX Short-Term Futures ETN (NYSEARCA:VXX):  -0.98%, This ETN is designed to track volatility in the markets as measured by the Chicago Board Options Exchange Market Volatility Index (CBOE Index), a popular measure of the implied volatility of S&P 500 index options.  The CBOE Volatility Index is also known as the “fear” index or “fear” indicator in markets.  The iPath S&P 500 VIX Short-Term Futures ETN (NYSEARCA:VXX) prices itself off of the average and implied volatility of the first two months of futures contracts of the S&P 500 Index.

VelocityShares Daily 2X VIX Short-Term ETN (NYSEARCA:TVIX):  -1.19%,  This ETN is designed to track 2X return on volatility in the markets as measured by the S&P 500 VIX Short-Term Futures Index.  The S&P 500 VIX Short-Term Futures Index measures the volatility of the S&P 500 Index via futures contracts as traded on the CBOE.

iPath S&P 500 VIX Mid-Term Futures ETN (NYSEARCA:VXZ):  -0.49%, This ETN is designed to track volatility in the markets as measured by the CBOE Volatility Index futures contracts.  The CBOE Volatility Index is also known as the “fear” index or “fear” indicator in markets.  The iPath S&P 500 VIX Mid-Term Futures ETN (NYSEARCA:VXZ) is priced from the average volatility of the 4^th through 7^th month futures contracts of the S&P 500 Index as traded on the CBOE.

S&P 500 Dynamic VIX ETN (NYSEARCA:XVZ):  -0.18%, This ETN is designed to track volatility in the markets as measured by the S&P 500 Dynamic VIX Futures Total Return Index.  The S&P 500 Dynamic VIX Futures Total Return Index seeks to combine results of volatility of the S&P 500VIX Short-Term Futures Index Excess Return and the S&P 500 VIX Mid-Term Futures Index Excess Return to create an accurate market volatility reading, as measured by the CBOE.

Velocity Shares Daily Inverse VIX Short-Term ETN (NYSEARCA:XIV):  +0.93%, This ETN is designed to inversely track the volatility in the markets as measured by the S&P 500 VIX Short-Term Futures Index.  The S&P 500 VIX Short-Term Futures Index measures the volatility of the S&P 500 Index via futures contracts traded on the CBOE.

Bottom line:  Stock market volatility got a boost on Tuesday, despite a better-than-expected reading on the Small Business Optimism Index for April, as well as new record intraday and closing highs for the S&P 500. 

The Small Business Optimism Index finally escaped from a rut of nihilism to reach a better-than-expected reading of 92.1 for April.  The result was above the recovery average of 90.7, beating economists’ expectations of an advance from 89.5 in March to 90.5 in April.  Investors responded enthusiastically to the report, sending the S&P 500 to new record intraday and closing highs.

The Dow Jones Industrial Average (NYSEARCA:DIA) jumped 123 points to finish Tuesday’s trading session at 15,215 for a 0.82 percent advance.  The S&P 500 (NYSEARCA:SPY) surged 1.01 percent to set a new record-high close at 1,650.34.  The S&P also reached a new intraday record high of 1,651.10.

The Nasdaq 100 (NASDAQ:QQQ) rose 0.47 percent to 2,996.  The Russell 2000 (NYSEARCA:IWM) jumped 1.25 percent to a new record high close at 985.96.

In other major markets, oil (NYSEARCA:USO) declined 0.89 percent to close at $33.56.

On London’s ICE Futures Europe Exchange, June futures for Brent crude oil  declined by 11 cents (0.11 percent) to $102.53/bbl. (NYSEARCA:BNO, NYSEARCA:USO).

June gold futures declined by $10.70 (0.75 percent) to $1,423.60 per ounce (NYSEARCA:GLD).

Read “Turning Point for Uranium and Rare Earth Miners?”

Transports accellerated on Tuesday, with the Dow Jones Transportation Index (NYSEARCA:IYT) surged 1.85 percent.

European stocks made a strong afternoon advance on Tuesday.  Stocks initially declined after a report indicated that German investor confidence remained in the doldrums.  Investor enthusiasm was sparked in the afternoon, when the Eurogroup finance ministers, meeting in Brussels, discussed creating a common banking union which would include a backstop mechanism for handling failed banks.  The Euro STOXX 50 Index finished Tuesday’s trading session with a 0.66 percent advance to 2,795 – remaining above its 50-day moving average of 2,676.

Read “European Stocks Rebound after Disappointment from Germany”

Japanese stocks made a slight retreat on Tuesday as investors went on a wave of profit-taking as many stocks began to appear overbought following the recent rally after the exchange rate for the yen fell below a penny.  A weaker yen results in more-competitive prices for Japanese exports in foreign markets (NYSEARCA:FXY).  The Nikkei 225 Stock Average dipped 0.16 percent to 14,758 (NYSEARCA:EWJ).

In China, stocks declined after JPMorgan Chase lowered its second-quarter GDP forecast to 7.8 percent to 8.0.  Monday’s disappointing report on fixed-asset investment was just the latest in a string of economic reports which demonstrate an economic slowdown in China.  The Shanghai Composite Index sank 1.11 percent to 2,217 (NYSEARCA:FXI).  Hong Kong’s Hang Seng Index declined 0.26 percent to 22,930 (NYSEARCA:EWH).

Technical indicators reveal that the S&P 500 remains far above its 50-day moving average of 1,574 after closing at 1,650.34 – motivating bears to hope that we are watching the formation of a head-and-shoulders pattern, which would signal a decline.  Its Relative Strength Index ticked upward from 67.37 to 71.49 – beyond the threshold level of 70, which most investors consider an “overbought” signal.  The MACD remains above the signal line, suggesting the likelihood of a further advance.

Read “Financial Stocks Jump Out of the Gate”

For the day, all sectors finished in solidly positive territory.  The big winners were the financial and energy sectors.  The technology sector was the laggard of the group, with a 0.32 percent advance.

Consumer Discretionary (NYSEARCA:XLY):  +1.02%

Technology:  (NYSEARCA:XLK):  +0.32%

Industrials (NYSEARCA:XLI):  +1.23%

Materials: (NYSEARCA:XLB):  +1.24%

Energy (NYSEARCA:XLE):  +1.42%

Financials: (NYSEARCA:XLF):  +1.71%

Utilities (NYSEARCA:XLU):  +0.68%

Health Care: (NYSEARCA:XLV):  +1.01%

Consumer Staples (NYSEARCA:XLP):  +1.19%

Bottom line:  A jump in the Small Business Optimism Index for April kept those “animal spirits” alive on Wednesday, sending the S&P 500 to new record intraday and closing highs. 

European stocks were off to a slow start on Tuesday after a disappointing report from the ZEW Centre for European Economic Research revealed that German investor confidence remained at a lackluster 36.4 in May after advancing by only 0.1 point.  Reports on GDP data from a number of Eurozone nations – including Germany – are scheduled for release on Wednesday (NYSEARCA:EWG).

European investors exhibited more bullishness after the Eurogroup finance ministers, meeting in Brussels, discussed creating a common banking union which would include a backstop mechanism for handling failed banks.  A number of better-than-expected corporate earnings reports helped fuel the mid-day rebound (NYSEARCA:VGK),

The Euro STOXX 50 Index finished Tuesday’s trading session with a 0.66 percent advance to 2,795 – remaining above its 50-day moving average of 2,676.  So far, the STOXX 50 has been above 2,700 throughout the month of May.  Its Relative Strength Index is 66.33 (NYSEARCA:FEZ).  The FTSE 100 Index surged 0.82 percent to 6,686 (NYSEARCA:EWU).

The German DAX Index climbed 0.72 percent to 8,339 (NYSEARCA:EWG).  France’s CAC 40 Index rose 0.53 percent to 3,966 (NYSEARCA:EWQ).  Spain’s IBEX 35 Index advanced 0.20 percent to 8,474 (NYSEARCA:EWP).  Italy’s FTSE MIB Index surged 0.84 percent to 17,315 (NYSEARCA:EWI).

As of 3:07 EDT, the euro declined 0.27 percent against the dollar, trading at $1.2940 (NYSEARCA:FXE).

Spain’s ten-year bond yield rose to 4.34 percent on Tuesday from Monday‘s closing level of 4.28 percent (NYSEARCA:EWP).  Spain’s two-year bond yield climbed to 1.78 percent on Tuesday from Monday‘s closing level of 1.70 percent (NYSEARCA:EWP).

Italy’s ten-year bond yield advanced to 4.06 percent on Tuesday from Monday‘s closing level of 3.96 percent (NYSEARCA:EWI).

On London’s ICE Futures Europe Exchange, June futures for Brent crude oil  declined by 18 cents (0.18 percent) to $102.46/bbl. (NYSEARCA:BNO, NYSEARCA:USO).  A Commodity Play to Counteract the Summer Swoon

June gold futures declined by $8.80 (0.61 percent) to $1,425.50 per ounce (NYSEARCA:GLD).  Broader Picture Intermarket Money Flow for May 2013

In China, stocks declined after JPMorgan Chase lowered its second-quarter GDP forecast to 7.8 percent from 8.0.  Monday’s disappointing report on fixed-asset investment was just the latest in a string of reports which demonstrate an economic slowdown in China.  The Shanghai Composite Index sank 1.11 percent to 2,217 (NYSEARCA:FXI).  Hong Kong’s Hang Seng Index declined 0.26 percent to 22,930 (NYSEARCA:EWH).

Japanese stocks made a slight retreat on Tuesday as investors went on a wave of profit-taking.  Many stocks began to appear overbought following the recent rally after the exchange rate for the yen fell below a penny.  A weaker yen results in more-competitive prices for Japanese exports in foreign markets (NYSEARCA:FXY).  The Nikkei 225 Stock Average dipped 0.16 percent to 14,758 (NYSEARCA:EWJ).

American stock index futures held close to the breakeven level ahead of Tuesday’s opening bell, as investors kept a cautious outlook about how long the rally can last.  The June 13 Dow Jones Industrials future advanced 0.04 percent to 15,063 as of 9:15 EDT.  The June 13 S&P 500 future rose 0.09 percent to 1,632 (NYSEARCA:SPY).  The June 13 Nasdaq 100 future remained unchanged at 2,981.

Bottom line:  The major European stock indices managed to advance after a disappointing report on German investor confidence – just one day ahead of the release of Germany’s GDP report, which will indicate whether or not the nation is in recession.

Investors received a nice surprise on Monday morning, when the Commerce Department’s Census Bureau reported that retail sales for April advanced by 0.1 percent, despite economists’ expectations of a 0.3 percent decline.  Because the economy is 70-percent consumer-driven, the better-than-expected result signals that the economic recovery is continuing, despite the budget sequester.  Retail sales ex autos declined by 0.1 percent, as expected by economists.  Compared with April of 2012, retail sales increased by 3.7 percent.  April’s increase followed a 0.5 percent decline in March.  How to Buy Stocks at “Ground Floor” Prices

From the report:

The U.S. Census Bureau announced today that advance estimates of U.S. retail and food services sales for April, adjusted for seasonal variation and holiday and trading-day differences, but not for price changes, were $419.0 billion, an increase of 0.1 percent (±0.3%)* from the previous month, and 3.7 percent (±0.7%) above April 2012. Total sales for the February through April 2013 period were up 3.7 percent (±0.5%)

from the same period a year ago. The February to March 2013 percent change was revised from -0.4 percent (±0.5%)* to -0.5 percent (±0.2%). 

Retail trade sales were virtually unchanged (±0.5%)* from March 2013 and 3.6 percent (±0.7%) above last year. Nonstore retailers were up 15.4 percent (±2.0) from April 2012 and auto and other motor vehicle dealers were up 8.8 percent (±2.0) from last year.

Also on Monday, the Commerce Department’s Census Bureau released its Manufacturing and Trade Inventories and Sales (“business inventories”) report for March.  Although economists had been expecting to see that business inventories increased by 0.3 percent in March, there was no change from February’s level.

From the report:

Sales.  The U.S. Census Bureau announced today that the combined value of distributive trade sales and manufacturers’ shipments for March, adjusted for seasonal and trading-day differences but not for price changes, was estimated at $1,269.6 billion, down 1.1 percent (±0.1) from February 2013 and up 1.8 percent (±0.3) from March 2012.

Inventories.  Manufacturers’ and trade inventories, adjusted for seasonal variations but not for price changes, were estimated at an end-of-month level of $1,640.9 billion, virtually unchanged (±0.1)* from February 2013 and up 4.5 percent (±0.5) from March 2012.

Inventories/Sales Ratio.  The total business inventories/sales ratio based on seasonally adjusted data at the end of March was 1.29. The March 2012 ratio was 1.26.

The major ETFs expected to respond to the April Retail Sales report, the March business inventories report are:

Consumer Staples Select Sector SPDR ETF (NYSEARCA:XLP):  +0.17%

SPDR S&P Retail ETF (NYSEARCA:XRT):  -0.37%

Consumer Discretionary Select Sector SPDR ETF (NYSEARCA:XLY):  +0.02%

iShares Russell 2000 Index ETF (NYSEARCA:IWM):  -0.07%

Industrial Select Sector SPDR ETF (NYSEARCA:XLI):  -0.39%

Best & Worst ETFs and Mutual Funds: All-cap Value Style

Bottom line:  The unexpected advance in April retail sales came as good news to investors because the American economy is 70 percent consumer-driven.  Strong consumer demand is an encouraging sign that the economic recovery continues to progress.

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Last Thursday’s statement by Philadelphia Federal Reserve president Charles Plosser, to the effect that he would advocate attenuation of the quantitative easing program at the June 18 FOMC meeting, made it seem as though volatility might be returning to the stock market.  Weekend reports on the Federal Reserve’s plans to taper back its quantitative easing program raised the stakes, as VIX investors began to smell blood.  Since the stock market has been so dependent on quantitative easing, fear that the punchbowl would be removed might appear as the best scenario available for a VIX advance.  Stock Market Gets Big News After Friday’s Close

Investor complacency had been in full force on Friday, when the VIX made a retreat as both the Dow and the S&P 500 finished at record-high closing levels despite the lack of new economic data or corporate earnings reports.

On Monday morning, the Commerce Department’s Census Bureau reported that retail sales for April increased by 0.1 percent, despite economists’ expectations of a 0.3 percent decline.  Because the economy is 70-percent consumer-driven, the better-than-expected result reinforced the investor complacency we saw on Friday.  The good news eclipsed the “quantitative easing taper” story.  Do investors now believe that the economy has made enough of a recovery that they won’t mind if the Fed scales back its use of the liquidity pump?  Time will tell.

The VIX has remained significantly below its 50-day moving average since May 3, although it briefly popped above the 50-day MA on May 9, before declining.  The VIX finished Monday’s session with a 0.32 percent drop to 12.55.  The chart reveals that the 50-day moving average is continuing on a downward trajectory, moving further below the 200-day moving average.  Its Relative Strength Index declined from Friday’s 44.99 to 44.79.  Both the MACD and the signal line are continuing their trajectory below the zero line, which usually signals a further decline.  Moon Over Manhattan

VIX ETF Update: 

Volatility Index – New Methodology (VIX): Index: 12.55,  -0.32%,

iPath S&P 500 VIX Short-Term Futures ETN (NYSEARCA:VXX):  -0.43%

VelocityShares Daily 2X VIX Short-Term ETN (NYSEARCA:TVIX):  -1.47%

 iPath S&P 500 VIX Mid-Term Futures ETN (NYSEARCA:VXZ):  +0.30%

S&P 500 Dynamic VIX ETN (NYSEARCA:XVZ):  +0.66%

Velocity Shares Daily Inverse VIX Short-Term ETN (NYSEARCA:XIV):  +0.60%

Bottom line:  Although the indicators on the VIX chart suggest the likelihood of a further decline, VIX investors can find encouragement from the possibility that the S&P 500 chart could be setting up a head-and-shoulders pattern.  As the S&P’s relative strength index approaches the “overbought” range, we could see some equity outflows which complete the formation of the head-and-shoulders pattern, sending investors running for the exits and boosting the VIX.   

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Concern about the weekend reports on the Federal Reserve’s plans to taper back its quantitative easing program were eclipsed by a better-than-expected Retail Sales report on Monday.  After the Commerce Department’s Census Bureau reported that retail sales for April advanced by 0.1 percent, compared with economists’ expectations of a 0.3 percent decline, the bulls were back to retain their turf.

The Dow Jones Industrial Average (NYSEARCA:DIA) lost 26 points to finish Monday’s trading session at 15,091 for a 0.18 percent decline.  The S&P 500 (NYSEARCA:SPY) climbed a nearly-imperceptible seven one-hundredths of a single point (not a percentage) to set a new record-high close at 1,633.77 from Friday’s 1,633.70.  The S&P also reached a new intraday record high of 1,636.

The Nasdaq 100 (NASDAQ:QQQ) rose 0.04 percent to 2,982.  The Russell 2000 (NYSEARCA:IWM) slipped 0.14 percent from Friday’s record high close to end the day at 973.

In other major markets, oil (NYSEARCA:USO) declined 0.82 percent to close at $33.86.

On London’s ICE Futures Europe Exchange, June futures for Brent crude oil  declined by $1.15 (1.11 percent) to $102.50/bbl. (NYSEARCA:BNO, NYSEARCA:USO).

June gold futures declined by $6.00 (0.42 percent) to $1,430.60 per ounce (NYSEARCA:GLD).

Read “Gold Rebound Fades”

Transports slipped into reverse on Monday, with the Dow Jones Transportation Index (NYSEARCA:IYT) declining 0.51 percent.

European stocks had a tough session on Monday, as investors remained concerned about Wednesday’s release of GDP data on a number of Eurozone countries, including Germany.  The Euro STOXX 50 Index finished Monday’s trading session with a 0.28 percent decline to 2,777 – remaining above its 50-day moving average of 2,673.

Read “European Stocks Struggle Ahead of GDP Data”

Japanese stocks continued to climb higher on Monday after the G-7 finance ministers, at their weekend meeting in Britain, signaled that they had no objection to further weakening of the yen.  A weaker yen results in more-competitive prices for Japanese exports in foreign markets (NYSEARCA:FXY).  During Monday’s trading session in Tokyo, the yen sank as low as 102.11 per dollar.  The Nikkei 225 Stock Average jumped 1.20 percent to 14,782 (NYSEARCA:EWJ).

In China, stocks declined after a report from the National Bureau of Statistics revealed that fixed-asset investment during the first quarter of the year advanced by 20.6 percent, falling short of economists’ expectations of a 20.9 percent increase.  The Shanghai Composite Index declined 0.22 percent to 2,241 (NYSEARCA:FXI).  Hong Kong’s Hang Seng Index sank 1.42 percent to 22,989 (NYSEARCA:EWH).

Technical indicators reveal that the S&P 500 remains far above its 50-day moving average of 1,572 after closing at 1,633.77 – motivating bears to hope that we are watching the formation of a head-and-shoulders pattern, which would signal a decline.  Its Relative Strength Index ticked upward from 67.36 to 67.37 – approaching the threshold level of 70.  Most investors consider a Relative Strength Index above 70 as an “overbought” signal.  The MACD remains above the signal line, suggesting the likelihood of a further advance.

Read “Stock Market Gets Big News After Friday’s Close”

For the day, half of the sectors finished in negative territory.  The biggest losers were the materials and utility sectors.  The healthcare sector had the best day of the group, with a 0.83 percent advance.

Consumer Discretionary (NYSEARCA:XLY):  +0.02%

Technology:  (NYSEARCA:XLK):  -0.25%

Industrials (NYSEARCA:XLI):  -0.39%

Materials: (NYSEARCA:XLB):  -0.71%

Energy (NYSEARCA:XLE):  -0.01%

Financials: (NYSEARCA:XLF):  +0.31%

Utilities (NYSEARCA:XLU):  -0.53%

Health Care: (NYSEARCA:XLV):  +0.83%

Consumer Staples (NYSEARCA:XLP):  +0.17%

Bottom line:  Many stock sectors finished Monday’s trading session in negative territory, despite the fact that the S&P 500 set a new record intraday high and barely beat Friday’s record high close.

European stocks experienced turmoil on Monday, with reports on GDP data from a number of Eurozone nations – including Germany – scheduled for release on Wednesday (NYSEARCA:VGK).  The banking and airline sectors took the hardest hits on Monday.

The Euro STOXX 50 Index finished Monday’s trading session with a 0.28 percent decline to 2,777 – remaining above its 50-day moving average of 2,673.  After breaking above its overhead resistance level of 2,700 on January 21, the STOXX 50 immediately retreated and spent the next three months trying to surpass that barrier.  So far, the STOXX 50 has been above 2,700 throughout the month of May.  Its Relative Strength Index is 65.12 (NYSEARCA:FEZ).  The FTSE 100 Index rose 0.10 percent to 6,639 (NYSEARCA:EWU).

The German DAX Index crept upward by 0.01 percent to 8,279 (NYSEARCA:EWG).  France’s CAC 40 Index declined 0.22 percent to 3,945 (NYSEARCA:EWQ).  Spain’s IBEX 35 Index sank 1.01 percent to 8,457 (NYSEARCA:EWP).  Italy’s FTSE MIB Index fell 0.65 percent to 17,171 (NYSEARCA:EWI).

As of 2:31 EDT, the euro declined 0.14 percent against the dollar, trading at $1.2971 (NYSEARCA:FXE).

Spain’s ten-year bond yield advanced to 4.26 percent on Monday from Friday‘s closing level of 4.22 percent (NYSEARCA:EWP).  Spain’s two-year bond yield climbed to 1.70 percent on Monday from Friday‘s closing level of 1.63 percent (NYSEARCA:EWP).

Italy’s ten-year bond yield rose to 3.96 percent on Monday from Friday‘s closing level of 3.87 percent (NYSEARCA:EWI).

On London’s ICE Futures Europe Exchange, June futures for Brent crude oil  declined by $1.12 (1.08 percent) to $102.53/bbl. (NYSEARCA:BNO, NYSEARCA:USO).  Placing Bets on Colombia: Paul Harris

June gold futures declined by $3.80 (0.26 percent) to $1,432.80 per ounce (NYSEARCA:GLD).  Precious Metal Royalties: The New Landscape

In China, stocks declined after a report from the National Bureau of Statistics revealed that fixed-asset investment during the first quarter of the year advanced by 20.6 percent, falling short of economists’ expectations of a 20.9 percent increase.  The Shanghai Composite Index declined 0.22 percent to 2,241 (NYSEARCA:FXI).  Hong Kong’s Hang Seng Index sank 1.42 percent to 22,989 (NYSEARCA:EWH).

Japanese stocks made big gains again on Monday after the G-7 finance ministers, at their weekend meeting in Britain, signaled that they had no objection to further weakening of the yen.  A weaker yen results in more-competitive prices for Japanese exports in foreign markets (NYSEARCA:FXY).  During Monday’s trading session in Tokyo, the yen sank as low as 102.11 per dollar.  The Nikkei 225 Stock Average jumped 1.20 percent to 14,782 (NYSEARCA:EWJ).

American stock index futures were in negative territory ahead of Monday’s opening bell as investors remained nervous about the market’s reaction to the report that the Federal Reserve has been making plans to taper back quantitative easing.  The June 13 Dow Jones Industrials future declined 0.27 percent to 15,077 as of 9:26 EDT.  The June 13 S&P 500 future fell 0.16 percent to 1,631 (NYSEARCA:SPY).  The June 13 Nasdaq 100 future dipped 0.10 percent to 2,963.

Bottom line:  As European stocks had a tough day with mounting concerns about Wednesday’s release of Eurozone GDP data, Japanese stocks continued to soar as the exchange rate for the yen dropped below a penny.   

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Courtesy of NASA

The stock market put on another record setting show with the Dow Jones Industrial Average (NYSEARCA:DIA) closing at a record high 15,118 and the S&P 500 (NYSEARCA:SPY) closing at 1633.70, another all time closing high.

For the week, the Dow Jones Industrial Average (NYSEARCA:DIA) gained 1%, the S&P 500 (NYSEARCA:SPY) climbed 1.2%, the Nasdaq Composite (NYSEARCA:QQQ) added 1.7% and the Russell 2000 (NYSEARCA:IWM) jumped 2.2%.

However, as exciting as the week’s stock market action was, the big news came after the close on Friday when Wall Street Journal reporter Jon Hilsenrath published an article detailing a new Federal Reserve strategy for unwinding its $85 billion/month in bond buying known as QE3.

This is big news, of course, because recent stock market action has been labeled “The Bernanke Rally” or “The Bernanke Put” as investors count on the Federal Reserve to support stock market prices and protect them from potential declines.

On My ETF Radar

chart courtesy of StockCharts.com

In the chart above, we see how the S&P 500 (NYSEARCA:SPY) has begun tracking a near parabolic ascent that began in January.  The S&P 500 (NYSEARCA:SPY) is now 11% above its 200 day moving average, the greatest divergence seen since March, 2000, just before the beginning of the dot-com crash.  Will history repeat or only rhyme and in Yogi Berra’s famous words, are you ready for “déjà vu all over again?”

Read Best ETFs for the Coming Blow Off Top

ETF News You Can Really Use

Based on the after market close Wall Street Journal article, it seems that the Fed is planning to take away the “punch bowl” of easy money, however, the timing and scope of the program is unknown.

As we all know, markets don’t like uncertainty, and this development, coming along with a steady stream of economic reports indicating a slowing global economy, is potentially significant, indeed.

The Fed finds itself in a tricky place as timing the exit will likely be difficult, at best.  Leaving it in place too long could continue to stoke asset bubbles while too quick an exit could lead to significant stock market declines along with volatility in bond and commodity markets.

Here’s a quick summary of recent events:

1.  Stock market levitating to record highs on a daily basis.

2.  Macro economy slowing around the world with a steady stream of declining economic reports.

3.  Near record margin debt, the highest level seen since 2007, just before the last market highs and subsequent meltdown associated with the 2007-2008 financial crisis.  Margin debt is now north of $350 billion for March and is thought to have possibly reached record highs in April, and this is typically a bearish indicator as excessive risk taking tends to mark market tops.  Also, should a sell off begin, margin calls tend to accelerate the decline as investors have to close positions and so selling can rapidly accelerate under these conditions.

4. Technical indicators put major stock markets in highly overbought conditions and so vulnerable to decline.  The stock market is exhibiting signs of a “blow off top” and Friday’s news from the Fed further add to the risk of a quick reversal.

Last week saw a “another day, another record” as stock markets around the world responded to stimulus action by central banks in Japan, Europe and the United States.

In economic reports, the weekly new unemployment claims report on Thursday beat expectations and March job openings were flat from the previous report.

Next week brings a wave of fresh economic reports:

Monday: April retail sales, March business inventories

Tuesday: NFIB Small Business Index

Wednesday: Producer price index, Empire State Index, Home builders index, industrial production

Thursday: weekly unemployment claims, consumer price index, housing starts, Philadelphia Fed report

Friday: consumer sentiment, leading economic indicators

Bottom line:  With new records, a levitating stock market and news from the Federal Reserve, investors will register their reactions on Monday.

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Investors anxiously await the Big Day for Germany:  Wednesday, May 15.  If the nation’s first quarter GDP reading is negative, Germany will officially join the rest of the Eurozone in recession.  A January 15 report from Destatis (Germany’s Federal Statistics Office) disclosed that that the German economy contracted by 0.4 percent during the fourth quarter of 2012, raising the question of whether the nation was already its way into recession during the first quarter of 2013.

Investors have been watching for hints as to whether the Eurozone’s largest economy contracted during the first quarter of 2013.  If Germany falls into the Eurozone recession, it will be seen as a signal of worse times yet to come for the other 16 nations which use the euro as their currency.  Britain managed to escape a triple-dip recession as its GDP went positive for the first quarter of 2013.  On April 25, Britain’s Office for National Statistics reported that the United Kingdom’s GDP expanded by 0.3 percent during the first quarter.  However, Britain uses its own currency and Germany is on the euro.  Eurozone Risks Don’t Rule Out Solid Income Opportunities

On May 7,  Destatis reported that industrial orders in Germany rose during March by 2.2 percent, despite economists’ expectations for a 0.6 percent decline.  A May 8 report from Destatis indicated that Germany’s industrial production increased by 1.2 percent in March (on a month-over-month basis).

On May 10, Destatis released its data on German exports during March.  Although the nation’s exports increased by 0.5 percent from February, between March of 2012 and March of 2013, exports decreased by 4.2 percent.

According to Destatis, Germany’s unemployment rate declined from 6.0 percent in February to 5.6 in March.  On the other hand, in March of 2012 the nation’s unemployment rate was 5.5 percent.

A May 8 report from Markit Economics suggested that although Germany’s economy may have expanded during the first quarter, the second quarter has been signaling more contraction:

The official data therefore add to a picture of the German economy having returned to growth in the first quarter, having suffered from falling manufacturing output in four of the six months up to January.  However, the improvement in the first quarter had already been signaled by the business surveys, which have since fallen back again, suggesting the upturn in these official data may prove short-lived.

*   *   *

The survey data (including services) even raise the possibility of the German economy returning to contraction in the second quarter if the data continue to weaken. The PMIs signaled a 0.3% increase in GDP in the first quarter, but in April fell to a level consistent with a 0.1% quarterly rate of decline.

The chart (below) depicts trading activity for the iShares MSCI Germany Index ETF (NYSEARCA:EWG).  (Chart courtesy of Stockcharts.com).

EWG went on a relatively steady climb above its 50-day moving average from April 26 to May 8, when it closed at $26.39.  By Friday’s close EWG was at $26.18.  EWG still remains $1.22 (4.88 percent) above its 50-day moving average of $24.96.  The Relative Strength Index for EWG rose to a healthy 65.10.  The MACD is well above the signal line, although its trajectory has flattened while the signal line’s trajectory continues to head upward, suggesting a stalled advance or possibly a decline ahead,

Germany ETF Update: 

iShares MSCI Germany Index Fund ETF (NYSEARCA:EWG):  +0.19%, This ETF is designed to track the performance of the MSCI Germany Index.  The MSCI Germany Index tracks German stock market performance as reflected by the performance of top companies and sectors in Germany including Siemens, Bayer, SAP, and Deutsche Bank.  Learn More About iShares ETFs

MarketVectors Germany Small Cap ETF (NYSEARCA:GERJ):  0.24%, This ETF is designed to track the performance of the Market Vectors Germany Small-Cap Index.  Its holdings consist of 83 stocks from the industrials, financials, and consumer discretionary sectors.

First Trust Germany AlphaDEXx ETF (NYSEARCA:FGM):  +0.06%, This ETF is designed to track the performance of an equity index called the Defined Germany Index.  The AlpaDEX approach is designed to focus on the best stocks and avoid the worst and it limits its holdings to 40 stocks.  Its annual expense ratio is 0.8 percent.

Vanguard MSCI Europe ETF (NYSEARCA:VGK):  +0.40%, This ETF is designed to track the performance of the MSCI Europe Index.  The MSCI Europe Index tracks the Europe stock market performance as reflected by the performance of top companies and sectors in developed Europe including France, Germany, Greece, The United Kingdom, Sweden, Norway, and Italy.

3 Reasons to Explore the Frontier

Bottom line:  Germany’s upbeat economic data for March could have signaled some degree of expansion for the first quarter of 2013, saving the nation from recession.  According to Markit Economics, the PMI data for Germany suggest that first quarter GDP expanded by 0.3 percent.  We will find out whether or not Markit was right when Germany releases its first quarter GDP reading on Wednesday, May 15.

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Gold has been struggling to make a comeback since the mid-April selloff.  Since April 25, the spot price of gold has been testing resistance at $1,500 per ounce, only to find it an unapproachable barrier.  In fact, the spot price was unable to reach $1,490 during that period.  Friday brought a more significant decline as more significant ETF outflows took their toll.

The chart below depicts the trading activity in the SPDR Gold Trust ETF (NYSEARCA:GLD) during the past 180 days (Chart courtesy of Stockcharts.com).

At Friday’s close, GLD had made a 0.86 percent decline to $139.60, representing a 1.75 percent drop from last Friday’s closing price of $142.09.  GLD is $7.86 (or 5.33 percent) below its 50-day moving average.  Although its the MACD remains above the signal line, it has established a level trajectory below the zero line, suggesting a further decline.  Its Relative Strength Index has dropped to 41.56 from last week’s 45.87.  China Buys Gold

The following is a summary of how precious metal spot prices and ETFs performed from the close on Friday, May 3 until the close on Friday, May 10:

Gold ETF Update: 

Gold Spot Price:  $1,477.70/oz,   -1.50%

SPDR Gold Trust ETF (NYSEARCA:GLD):  -1.75%, This ETF reflects the current price and trends of Gold Bullion and so offers exposure to the gold market within a brokerage account.  The gold spot price for NYSEARCA:GLD is determined by the 24 hour global over-the-counter (OTC) gold market.  The SPDR Gold Trust ETF (NYSEARCA:GLD) is the world’s largest gold ETF and second largest ETF in existence.

iShares Gold Trust ETF (NYSEARCA:IAU):  -1.68%, This ETF reflects the current price and trends of Gold Bullion and so offers exposure to the gold market within a brokerage account.  The iShares Gold Trust ETF (NYSEARCA:IAU) is backed by gold held in trusts located in London, Toronto, and New York.  The gold spot price for the iShares Gold Trust ETF (NYSEARCA:IAU) is set by the London PM Fix Price for spot gold as determined by the London Bullion Market Association.

Silver ETF Update: 

Silver Spot Price:  $23.88 oz,   -0.87%

iShares Silver Trust ETF (NYSEARCA:SLV):  -1.33%, This ETF reflects the current price of silver and trends of Silver Bullion and so offers exposure to the silver market within a brokerage account.  The iShares Silver Trust ETF (NYSEARCA:SLV) is backed by real silver and the silver price is set by the London PM Fix Price for silver as determined by the London Bullion Market Association.

ProShares Ultra Silver ETF (NYSEARCA:AGQ):  -2.62%, This ETF reflects the 2X daily return of the current price of Silver Bullion.  The ETF is priced in US dollars based on the afternoon closing price of Silver in London.  The ProShares Ultra Silver ETF thus offers double exposure to the silver market within a brokerage account.

Platinum ETF Update: 

Platinum Spot Price:  $1,498.00 /oz,   -0.12%

ETFS Physical Platinum Shares ETF (NYSEARCA:PPLT):  -0.62% This ETF reflects the current spot price of physical platinum and so offers exposure to the platinum market within a brokerage account.  The price of platinum is specified by the London Platinum and Palladium Market (LPPM) rules and is backed by Platinum held in vaults in London, UK and Zurich, Switzerland.

Precious Metal Royalties: The New Landscape

Bottom Line:  ETF outflows began to have an impact on the spot price of gold on Friday.  Although the gold ETFs made more significant declines than the spot price during the past week, the outflows from those ETFs will likely impact the spot price of gold next week. 

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The euro got off to a bad start during the week ending on Friday, May 10.  At his press conference at the conclusion of the European Central Bank governing council’s meeting to announce the key interest rate cut to 0.50 percent on May 3, ECB president Mario Draghi remarked that he was open to the idea of lowering the deposit interest rate to a negative number.  This sent the euro sinking.  Later that day, Draghi explained that he was just speaking hypothetically about a negative interest rate and the euro regained enough strength to finish the week with a slight advance.

Monday, May 6 began with another Draghi-prompted euro swoon.  While discussing the May 3 interest rate cut, Draghi announced that the ECB would not hesitate to intervene in the event of further economic deterioration in the Eurozone.  Draghi raised some eyebrows with the statement:  “We stand ready to act again …”  This sent the euro sinking once again.  Although the euro rebounded on Tuesday and Wednesday, the strength of the American dollar overpowered the euro at the end of the week.  GBP/USD Drops on U.S. Jobless Claims, BoE Decision

Wednesday, May 15 brings preliminary first quarter GDP readings from a number of Eurozone countries, including Germany.  Recent economic data for March brought some encouragement that the nation will avoid a recession.  Because Germany’s fourth-quarter 2012 GDP contracted by 0.4 percent, negative GDP for the first quarter would mean that the nation entered economic recession.  Whether or not Germany follows the rest of the Eurozone into recession, sinking GDP results from other countries – especially France – could cause more weakening of the euro.

The Eurogroup finance ministers will be meeting on Monday and Tuesday.  Obviously, any headlines resulting from those meetings will impact the euro’s exchange rate.

The chart below depicts the trading activity in the CurrencyShares Euro Trust ETF (NYSEARCA:FXE) during the past 180 days (Chart courtesy of Stockcharts.com).

As we pointed out on April 21, the advance of Tuesday, April 16 – which resulted in a close at $130.65 – appeared to be forming the right shoulder of a chart-sized head-and-shoulders pattern.  This eventually became the case, despite the advance on April 30 – May 1.  Once the chart-sized head-and-shoulders pattern became complete on May 10, FXE dipped below its 200-day moving average for the first time since April 4.  Friday’s close at $128.67 was just 6 cents above its 200-day moving average of $128.61 and 31 cents below its 50-day moving average of $128.98.  More important, its 50-day moving average is now just 37 cents above the 200-day moving average, with both headed toward each other, increasing the risk of an imminent “death cross”, which would almost guarantee a further decline.

The Relative Strength Index for FXE sank to 44.65 from last Friday’s close at 54.24. The MACD has now crossed below the signal line and is continuing on a downward trajectory.  This provides more evidence that FXE could be making a further decline.

Currency ETF Update: 

The following is a summary of how currency indices and ETFs performed from the close on Friday, May 3 until the close on Friday, May 10:

$US Dollar Index:  $83.17   +1.03%

PowerShares DB US Dollar Index Bullish Fund ETF (NYSEARCA:UUP):  +1.25%, This ETF reflects US dollar performance as indicated by the Deutsche Bank Long US Dollar Index (USDX) Futures Index (DB Long USD Futures Index).  The USDX Index invests solely in Long USDX Futures Contracts, and compares the performance of the US dollar against the Japanese Yen, the Euro, the Swiss Franc, the British Pound, the Canadian Dollar, and the Swedish Krona.

Euro Dollar Index-Philadelphia: EUR: $129.91   -0.95%

CurrencyShares Euro Trust ETF (NYSEARCA:FXE):   -1.01%, This ETF is designed to track the performance of the Euro dollar.  CurrencyShares Euro Trust ETF (NYSEARCA:FXE) is a trust denominated in Euro dollars, and the depository bank is JP Morgan Chase Bank, N.A. London Branch.

ProShares UltraShort Euro ETF (NYSEARCA:EUO):  +1.94%,  This ETF tracks the 2X inverse daily performance of the Euro dollar in US dollar prices.  The ProShares UltraShort Euro ETF (NYSEARCA:EUO) relies on the EUR/USD cross rate as determined by Reuters by 4 PM EST to determine the price of the Euro in US dollars.

Australian Dollar Index-Philadelphia: AUD: $100.15   -2.93%

CurrencyShares Australian Dollar Trust ETF (NYSEARCA:FXA):  -3.02%, This ETF is designed to track the performance of the Australian dollar.  The CurrencyShares Australian Dollar Trust ETF (NYSEARCA:FXA) is a trust denominated in Australian dollars, and the depository bank is JP Morgan Chase Bank, N.A. London Branch.

CurrencyShares Swiss Franc Trust ETF (NYSEARCA:FXF)  -2.27% This ETF is designed to track the performance of the Swiss Franc.  The Swiss franc is the national currency of Switzerland and Liechtenstein and the currency of the accounts of the Swiss National Bank, the central bank of Switzerland. The Swiss franc is the sixth-most-traded currency in the world, accounting for 6.4% of global foreign exchange transactions. The USD/Swiss franc pair is the fifth-most-traded currency pair.

Japanese Yen Index–Philadelphia: JPY:  $98.39     -2.56%

CurrencyShares Japanese Yen Trust ETF (NYSEARCA:FXY):  -2.51%   This ETF is designed to track the performance of the Japanese Yen.  The CurrencyShares Japanese Yen Trust ETF (NYSEARCA:FXY) is a trust denominated in Japanese Yen, and the depository bank is JP Morgan Chase Bank, N.A. London Branch.  Yen Weakness Creates Risk-On Gold Raid

Bottom Line:  While technical indicators suggest further weakening of the euro, Wednesday’s release of preliminary first-quarter GDP readings from a number of Eurozone countries could accelerate that process.  Meanwhile, although the yen made a decline of just over 2.5 percent during the week when it finally became worth less than a penny, the Australian Dollar and the Swiss Franc made steeper drops.     

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As this year’s impressive rally continues, U.S. stock indexes and ETFs are either on track for historic annual gains or are reaching bubble levels with the growing possibility of an approaching blow off top.

At Wednesday’s closing bell, the S&P 500 (NYSEARCA:SPY) and its related ETF were 157 points (or almost 11 percent) above its 200-day moving average.  The only time we have seen a wider gap between the S&P’s 200-day MA and its closing level was back in March of 2000, just before the dot-com crash.  Will history repeat or only rhyme and in Yogi Berra’s famous words, “Are you ready for déjà vu all over again?”

The stock indices cannot keep going up forever (contrary to what you may have been told by your favorite television stock market commentator).  At this point, multiple technical indicators are flashing warnings that markets are overbought and subject to a significant correction.

Beyond the fact that the S&P 500 (NYSEARCA:SPY) is closing at extreme levels above its 50-day and 200-day moving averages, its relative strength index is also near overbought conditions which begin at the threshold of 70.  At Wednesday’s close, the S&P’s RSI had reached 68.58 – although after Thursday’s retreat, the RSI had eased back to 65.54.  Investors respond to these signals which oftentimes make many stock market indicators self-fulfilling prophecies as other investors change their positions based on what they see on current charts.

chart courtesy of StockCharts.com

With the major stock indices at their current levels, investors remain concerned about the consequences of a blow off top and so many have their stops set high to preserve the maximum extent of the extreme gains they have realized so far.  If the stock market swoons, multiple stops will get triggered and a cascade of stop loss orders can quickly lead to a waterfall descent in today’s world of high frequency, computer driven trading.

Overbought conditions exist across all of the U.S. major stock market indexes and so the entire U.S. market is subject to a swift correction should one get underway.

At Wednesday’s closing level of 15,082.62, the Dow Jones Industrial Average was 1,437 points or 10.5 percent above its 200-day moving average.  The Russell 2000 closed at 966.26 on Wednesday which is 101 points or 11.68 percent above its 200-day moving average.  The Financial Select Sector SPDR ETF (NYSEARCA:XLF) closed on Wednesday at $19.17, 15.97 percent above its 200-day moving average.

Such conditions have set the stage for many institutions and hedge funds to try to front run an anticipated decline by taking short positions in futures contracts, shorting stocks or taking positions on inverse ETFs which are designed to gain in value should the stock market swoon in June.

Some examples of inverse ETFs include:

ProShares Short S&P 500 ETF (NYSEARCA:SH) – This ETF is designed to obtain results which represent the inverse (-1x) of the daily performance of the S&P 500. The fund invests in derivatives which ProShares Advisors believes should have similar daily return characteristics as the inverse of the daily return of the S&P 500.

ProShares Short Dow30 ETF (NYSEARCA:DOG) – This ETF is designed to obtain results which represent the inverse (-1x) of the daily performance of the Dow Jones Industrial Average. The fund invests in derivatives which ProShares Advisors believes should have similar daily return characteristics as the inverse of the daily return of the Dow Jones Industrial Average.

Investors with a greater appetite for risk (and return) can use leveraged inverse ETFs, by which their gains (or losses) will be magnified by approximately twice as much as a non-leveraged inverse ETF.

One of the most popular of these is:

ProShares Short Dow30 ETF (NYSEARCA:DXD) – This ETF is designed to obtain results which represent two times the inverse (-2x) of the daily performance of the Dow Jones Industrial Average. The fund invests in derivatives which ProShares Advisors believes should have similar daily return characteristics as two times the inverse (-2x) of the daily return of the Dow Jones Industrial Average.

For the truly daring, there are some leveraged inverse ETFs which will magnify the results by three times.  Two of the largest of these focus on the small cap and financial sectors which tend to be fast movers in falling markets:

Direxion Daily Small Cap Bear 3x Shares (NYSEARCA:TZA) – This ETF is designed to obtain results which represent 300 percent of the inverse of the Russell 2000 Index. The fund creates short positions by investing at least 80 percent of its assets in financial instruments which provide leveraged and unleveraged exposure to the index.
Direxion Daily Financial Bear 3x Shares (FAZ) – This ETF is designed to obtain results which represent 300 percent of the inverse of the Russell 1000 Financial Services Index. The fund, under normal circumstances, creates short positions by investing at least 80 percent of its assets in financial instruments which provide leveraged and unleveraged exposure to the Russell 1000 Financial Services Index.

Bottom line: With markets overbought and fundamental indicators pointing to a global economic slowdown, now could be a good time to consider protecting current positions or making a directional bet with inverse ETFs.  These products, particularly the leveraged class, can be tricky to use, so make sure to read the prospectuses carefully and understand how they work. Take time to plan your strategy for a summer swoon because there’s a good chance that significant opportunities will appear on the “short” side of the market as we head into the “sell in May and go away” period of the year.

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KraneShares, a newcomer in the ETF space specializing in China, recently filed paperwork with regulators for a China government bond ETF, putting “dim sum” bonds back on ETF investors’ maps.

According to the filing with the Securities and Exchange Commission, the KraneShares CSI China Government Bond ETF plans to hold Chinese Government Bonds (CGBs)—including bonds of policy banks and state-owned banks—issued outside of mainland China. The fund plans on targeting intermediate-term bonds, with maturities of 10 years or less.

While innovation in China equity ETFs—including access to China’s domestic “A-share” market—has been on most China investors’ minds, there’s also been a burgeoning dim sum bond market in Hong Kong that’s often overlooked.

First a bit of background.

Dim sum bonds are yuan-denominated bonds that are issued outside of mainland China—currently mostly issued and traded in Hong Kong. Dim sum bonds include a hodgepodge of government and corporate bonds issued by both Chinese and non-Chinese entities.

For example, foreign companies like McDonald’s, Caterpillar, Ford, Unilever, BP, Volkswagen, Rabobank, Renault and VTB Bank have also issued dim sum bonds in Hong Kong, to name just a few.

While there are already three dim sum bond ETFs in existence, the new KraneShares fund looks to separate itself from the pack by holding bonds of any rating issued only by Chinese government entities (CGBs and state-owned bank issues).

In comparison, the PowerShares Chinese Yuan Dim Sum Bond Portfolio (NYSEArca: DSUM) currently holds a broad mix of more than 85 investment-grade, below-investment-grade and unrated sovereign and corporate bonds from both Chinese and non-Chinese entities.

The other two choices—the Market Vectors Renminbi Bond ETF (NYSEArca: CHLC) and the Guggenheim China Yuan Bond ETF (NYSEArca: RMB)—hold smaller portfolios of sovereign and corporate bonds. While they both target only investment-grade bonds, Guggenheim’s RMB has the stricter mandate.

RMB holdings have to be rated investment grade by at least one of the “big three” rating agencies (S&P, Moody’s or Fitch), while Market Vectors’ CHLC offers more wiggle room, looking beyond just the “big three” and allowing bonds rated investment grade from a local rating agency.

Should the new Kraneshares ETF launch, it would be stepping into a niche theme that, so far, hasn’t quite resonated with most U.S.-based investors. The existing three funds only have a combined $80 million in assets, of which $72 million is in one fund, PowerShares’ DSUM.

RMB and CHLC, which only have $2.6 million and $5.3 million in assets, respectively, have also been plagued by extremely thin on-screen volume, sometimes going for days without any trading activity (see the choppiness in the chart below).

Source: Bloomberg

I’ve been quite surprised at the lack of interest in dim sum bond ETFs since the three funds launched within a month of each other in late 2011. I’m surprised mainly because these China bond funds have been largely ignored during a period of massive assets inflows into other emerging market debt ETFs.

Total AUM for emerging markets fixed-income ETFs is now over $13.7 billion, as investors have largely put aside credit risk to chase higher yields in recent years. Even the two broad emerging markets high- yield ETFs that launched after the three dim sum ETFs have nearly $250 million in assets apiece.

This might suggest that investors are wary of the credit risks associated with dim sum bond issuers (a legitimate concern), but again, how many investors piling into many emerging market bond ETFs truly understand the credit risks involved?

I think a better explanation is that perhaps the dim sum bond market is simply less understood.

One of the biggest draws for dim sum bonds is their yuan-denomination, giving investors direct currency exposure to offshore renminbi traded in Hong Kong (CNH), while collecting yields of 2-3 percent at the same time.

Plus, not all dim sum bonds are even below investment grade. To the contrary, many of them have investment-grade ratings from one or more of the three big rating agencies. So I’m not convinced it’s the credit risk that has been shunning investors away thus far.

I find it interesting that of the three existing funds, it looks like PowerShares’ DSUM—which includes bonds of any rating, including unrated bonds, and that has the highest yield of the bunch—is clearly pulling away from its “investment grade” peers in assets and liquidity in recent months.

Even with the slow start around dim sum bonds in the U.S., Kraneshares is not alone in filing for an ETF to target this nascent but fast-growing market. WisdomTree also has a filing for the WisdomTree China Local Debt Fund, an actively managed fund that will include dim sum bonds of both investment-grade and below-investment-grade quality.

As the offshore renminbi market grows, we should see more innovation in China ETFs coming our way, not only on the equities front, but also on the fixed-income front as well.

Dim sum bond ETFs provide another way to invest in the renminbi’s internationalization, and can be used to complement equity exposure for investors looking for a more comprehensive “Total China” portfolio.

At the time this article was written, the author held a long position in DSUM. Contact Dennis Hudachek at dhudachek@indexuniverse.com.

On Friday, Federal Reserve Chairman Ben Bernanke delivered a speech entitled, “Monitoring the Financial System” at the 49th Annual Conference on Bank Structure and Competition sponsored by the Federal Reserve Bank of Chicago, Chicago, Illinois.

Dr. Bernanke began the speech by highlighting the reforms to the financial system, which were implemented in the wake of the 2008 financial crisis.  An important theme of the speech is that the Fed is now focusing on vulnerabilities within the financial system, rather than the triggering mechanisms of a financial crisis:

The triggers of any crisis are the particular events that touch off the crisis–the proximate causes, if you will. For the 2007-09 crisis, a prominent trigger was the losses suffered by holders of subprime mortgages. In contrast, the vulnerabilitiesassociated with a crisis are preexisting features of the financial system that amplify and propagate the initial shocks. Examples of vulnerabilities include high levels of leverage, maturity transformation, interconnectedness, and complexity, all of which have the potential to magnify shocks to the financial system. Absent vulnerabilities, triggers might produce sizable losses to certain firms, investors, or asset classes but would generally not lead to full-blown financial crises; the collapse of the relatively small market for subprime mortgages, for example, would not have been nearly as consequential without preexisting fragilities in securitization practices and short-term funding markets which greatly increased its impact. Of course, monitoring can and does attempt to identify potential triggers–indications of an asset bubble, for example–but shocks of one kind or another are inevitable, so identifying and addressing vulnerabilities is key to ensuring that the financial system overall is robust. Moreover, attempts to address specific vulnerabilities can be supplemented by broader measures–such as requiring banks to hold more capital and liquidity–that make the system more resilient to a range of shocks.

Chairman Bernanke also focused on the need to monitor those entities everyone refers to as “too big to fail” banks.  Bernanke has adopted the term used by Dallas FedHead Richard Fisher:  Systemically Important Financial Institutions or “SIFIs”.  Insanity Cubed

It was an interesting speech because it was nice to hear that some – although not enough – changes are being made to correct a few of the conditions which led to the 2008 meltdown.  Dr. Bernanke concluded with this summary:

In closing, let me reiterate that while the effective regulation and supervision of individual financial institutions will always be crucial to ensuring a well-functioning financial system, the Federal Reserve is moving toward a more systemic approach that also pays close attention to the vulnerabilities of the financial system as a whole. Toward that end, we are pursuing an active program of financial monitoring, supported by expanded research and data collection, often undertaken in conjunction with other U.S. financial regulatory agencies. Our stepped-up monitoring and analysis is already providing important information for the Board and the Federal Open Market Committee as well as for the broader regulatory community. We will continue to work toward improving our ability to detect and address vulnerabilities in our financial system.

The major ETFs expected to respond to the Ben Bernanke’s speech, “Monitoring the Financial System” are:

iShares Dow Jones U.S. Financial Sector ETF (NYSEARCA:IYF)  +0.31%

SPDR S&P Regional Banking ETF (NYSEARCA:KRE):  +0.31%

Industrial Select Sector SPDR ETF (NYSEARCA:XLI)  +0.30%

iShares Russell 2000 ETF (NYSEARCA:IWM)  +0.76%  Learn More About iShares ETFs

iShares Dow Jones Real Estate ETF (NYSEARCA:IYR)  +0.03%

Dollar Extends Gains After U.S. Jobless Claims Report

Bottom line:  In addition to implementing its own measures – such as stress testing of banks – to avoid another financial crisis, the Federal Reserve plans to assist the Financial Stability Oversight Council (FSOC) in its efforts to reduce systemic risk.

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After Thursday’s statement by Philadelphia Federal Reserve president Charles Plosser, it began to appear as though volatility might be returning to the stock market.  Plosser explained that he would join forces with Kansas City FedHead Esther George to advocate attenuation of the quantitative easing program at the June 18 FOMC meeting.  Since the stock market has been so dependent on quantitative easing, fear that the punchbowl would be removed boosted the VIX on Thursday and the major stock indices fell into the red.

On Friday, the VIX made a retreat as both the Dow and the S&P 500 finished at record-high closing levels, despite the lack of new economic data or corporate earnings reports.  It was a true signal of investor complacency as investors were obviously remaining on their positions out of concern that more gains might be missed by taking profits on Friday.  Stock Option Picks Require Analyzing the Overall Market

The VIX has remained significantly below its 50-day moving average since last Friday, although it briefly popped above the 50-day MA on Thursday, before declining.  The VIX finished Friday’s session with a 4.11 percent drop to 12.59.  The chart reveals that the 50-day moving average is continuing on a downward trajectory, moving further below the 200-day moving average.  Its Relative Strength Index declined from Thursday’s 47.58 to 44.99.  Both the MACD and the signal line are continuing their trajectory below the zero line, which usually signals a further decline.  Popular Consumer Confidence Measure Falls

VIX ETF Update: 

Volatility Index – New Methodology (VIX): Index:  12.59,  -4.11%,

iPath S&P 500 VIX Short-Term Futures ETN (NYSEARCA:VXX):  -0.98%, This ETN is designed to track volatility in the markets as measured by the Chicago Board Options Exchange Market Volatility Index (CBOE Index), a popular measure of the implied volatility of S&P 500 index options.

VelocityShares Daily 2X VIX Short-Term ETN (NYSEARCA:TVIX):  -1.12%, This ETN is designed to track 2X return on volatility in the markets as measured by the S&P 500 VIX Short-Term Futures Index.

iPath S&P 500 VIX Mid-Term Futures ETN (NYSEARCA:VXZ):  +1.00%, This ETN is designed to track volatility in the markets as measured by the CBOE Volatility Index futures contracts.

S&P 500 Dynamic VIX ETN (NYSEARCA:XVZ):  +0.98%, This ETN is designed to track volatility in the markets as measured by the S&P 500 Dynamic VIX Futures Total Return Index.

Velocity Shares Daily Inverse VIX Short-Term ETN (NYSEARCA:XIV):  +1.04%, This ETN is designed to inversely track the volatility in the markets as measured by the S&P 500 VIX Short-Term Futures Index.

Bottom line: The VIX made a significant 4-percent decline on Friday as investor complacency was demonstrated by the fact that both the Dow and the S&P 500 closed at new record highs on a day with no new economic data or corporate earnings reports to feed the bulls.  Friday’s positive finish was based on pure momentum and investor concern that more gains will be missed by taking profits now.      

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Despite the lack of new economic data or corporate earnings reports on Friday, stocks continued to advance on pure momentum as investors apparently feared it may yet be too early to start taking profits by cashing-in their shares.

The Dow Jones Industrial Average (NYSEARCA:DIA) gained 35 points to finish Friday’s trading session at a new record-high closing level of 15,118.49 for a 0.24 percent advance.  The S&P 500 (NYSEARCA:SPY) climbed 0.43 percent to set a new record-high close at 1,633.70.

The Nasdaq 100 (NASDAQ:QQQ) rose 0.67 percent to 2,981.  The Russell 2000 (NYSEARCA:IWM) surged 0.92 percent to end the day at a record-high 975.

In other major markets, oil (NYSEARCA:USO) dipped 0.09 percent to close at $34.14.

On London’s ICE Futures Europe Exchange, June futures for Brent crude oil  declined by 71 cents (0.68 percent) to $103.49/bbl. (NYSEARCA:BNO).

Read “Behind the Rebound in Energy ETFs”

June gold futures declined by $21.00 (1.43 percent) to $1,447.60 per ounce (NYSEARCA:GLD).

Transports coasted on Friday, with the Dow Jones Transportation Index (NYSEARCA:IYT) advancing 0.56 percent.

All of the major European stock indices finished the week in positive territory.  The Euro STOXX 50 Index finished Friday’s trading session with a 0.44 percent advance to 2,785 – remaining above its 50-day moving average of 2,669.

Read “European Stocks Bring Positive Finish to the Week”

Japanese stocks made absurd gains on Friday at the conclusion of “yenny watch” as the yen finally broke below the psychological barrier of one American penny.  Japanese investors hope that with this barrier broken, the yen can decline even further.  A weaker yen results in more-competitive prices for Japanese exports in foreign markets (NYSEARCA:FXY).  After the closing bell in Tokyo, the yen sank as low as 101.94 per dollar.  The Nikkei 225 Stock Average skyrocketed 2.93 percent to 14,607 (NYSEARCA:EWJ).

In China, stocks advanced after the People’s Bank of China cut the yuan’s reference rate by 0.15 percent to 6.2016 per dollar.  Over the past few days, the currency reached its highest exchange rate in 19 years.  The weakened yuan gave the nation’s stock prices a modest boost.  The Shanghai Composite Index climbed 0.62 percent to 2,246 (NYSEARCA:FXI).  Hong Kong’s Hang Seng Index advanced 0.47 percent to 23,321 (NYSEARCA:EWH).

Technical indicators reveal that the S&P 500 remains far above its 50-day moving average of 1,570 after closing at 1,633.70 – motivating bears to hope that we are watching the formation of a head-and-shoulders pattern, which would signal a decline.  Its Relative Strength Index advanced from 65.54 to 67.36 – approaching the threshold level of 70.  Most investors consider a Relative Strength Index above 70 as an “overbought” signal.  The MACD remains above the signal line, suggesting the likelihood of a further advance.

Read “Impulsive Move Confirmed”

For the day, most sectors finished in positive territory except for the energy and materials sectors.  The healthcare and consumer discretionary sectors were the clear leaders of the group.

Consumer Discretionary (NYSEARCA:XLY):  +0.78%

Technology:  (NYSEARCA:XLK):  +0.29%

Industrials (NYSEARCA:XLI):  +0.30%

Materials: (NYSEARCA:XLB):  -0.10%

Energy (NYSEARCA:XLE):  -0.52%

Financials: (NYSEARCA:XLF):  +0.42%

Utilities (NYSEARCA:XLU):  +0.23%

Health Care: (NYSEARCA:XLV):  +0.99%

Consumer Staples (NYSEARCA:XLP):  +0.39%

Bottom line:  Both the Dow and the S&P 500 reached new record-high closing levels on a day when there were no new economic data or corporate earnings reports to feed the bulls.  Friday’s positive finish was based on pure momentum and investor concern that more gains will be missed by taking profits now.      

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All of the major European stock indices finished Friday’s session in positive territory, purely on momentum (NYSEARCA:VGK).  Investors continued to feel bullish on stocks after Britain’s Office for National Statistics reported on Thursday that the nation’s industrial production increased by 0.7 percent in March, beating economists’ expectations for a 0.2 percent rise (NYSEARCA:EWU).  The news followed Wednesday’s relief rally, which resulted from a report by Destatis, indicating that Germany’s industrial production increased by 1.2 percent in March (on a month-over-month basis).  Because Germany’s fourth-quarter 2012 GDP contracted by 0.4 percent, negative GDP for the first quarter would mean that the nation entered economic recession.  The upbeat industrial production report eased fears the Germany would participate in the recession experienced by the rest of the Eurozone (NYSERACA:EWG).

Of course, the week’s momentum for the European stock market began on Monday, when European Central Bank president Mario Draghi announced that the ECB would not hesitate to intervene in the event of further economic deterioration in the Eurozone.  Draghi raised some eyebrows with the statement:  “We stand ready to act again …”

The Euro STOXX 50 Index finished Friday’s trading session with a 0.44 percent advance to 2,785 – remaining above its 50-day moving average of 2,669.  After breaking above its overhead resistance level of 2,700 on January 21, the STOXX 50 immediately retreated and spent the next three months trying to surpass that barrier.  So far, the STOXX 50 has been above 2,700 throughout the month of May.  Its Relative Strength Index is 64.7 (NYSEARCA:FEZ).  The FTSE 100 Index rose 0.49 percent to 6,624 (NYSEARCA:EWU).

The German DAX Index advanced 0.19 percent to 8,278 (NYSEARCA:EWG).  France’s CAC 40 Index climbed 0.64 percent to 3,953 (NYSEARCA:EWQ).  Spain’s IBEX 35 Index declined 0.33 percent to 8,544 (NYSEARCA:EWP).  Italy’s FTSE MIB Index jumped 1.13 percent to 17,284 (NYSEARCA:EWI).  3 Reasons to Explore the Frontier

As of 2:39 EDT, the euro declined 0.41 percent against the dollar, trading at $1.2989 (NYSEARCA:FXE).

Spain’s ten-year bond yield advanced to 4.20 percent on Friday from Thursday‘s closing level of 4.19 percent (NYSEARCA:EWP).  Spain’s two-year bond yield rose to 1.64 percent on Friday from Thursday‘s closing level of 1.63 percent (NYSEARCA:EWP).

Italy’s ten-year bond yield advanced to 3.87 percent on Friday from Thursday‘s closing level of 3.86 percent (NYSEARCA:EWI).

On London’s ICE Futures Europe Exchange, June futures for Brent crude oil  declined by 67 cents (0.64 percent) to $103.53/bbl. (NYSEARCA:BNO, NYSEARCA:USO).

June gold futures declined by $32.50 (2.21 percent) to $1,436.10 per ounce (NYSEARCA:GLD).  China Buys Gold

In China, stocks advanced after the People’s Bank of China cut the yuan’s reference rate by 0.15 percent to 6.2016 per dollar.  Over the past few days, the currency reached its highest exchange rate in 19 years.  The weakened yuan gave the nation’s stock prices a modest boost.  The Shanghai Composite Index climbed 0.62 percent to 2,246 (NYSEARCA:FXI).  Hong Kong’s Hang Seng Index advanced 0.47 percent to 23,321 (NYSEARCA:EWH).

Japanese stocks made absurd gains on Friday after the yen finally broke below the psychological barrier of one American penny.  Japanese investors hope that with this barrier broken, the yen can decline even further.  A weaker yen results in more-competitive prices for Japanese exports in foreign markets (NYSEARCA:FXY).  After the closing bell in Tokyo, the yen sank as low as 101.94 per dollar.  The Nikkei 225 Stock Average skyrocketed 2.93 percent to 14,607 (NYSEARCA:EWJ).

American stock index futures were in positive territory ahead of Friday’s opening bell as investors anticipated that pure momentum would keep stocks moving upward through the last session of the week.  The June 13 Dow Jones Industrials future rose 0.13 percent to 15,064 as of 9:10 EDT.  The June 13 S&P 500 future advanced 0.09 percent to 1,626 (NYSEARCA:SPY).  The June 13 Nasdaq 100 future climbed 0.17 percent to 2,963.

Bottom line:  Friday’s global stock market activity underscored the importance of the role of central banks in levitating stock prices.  The week began with Super Mario Draghi at the ready with the ECB’s liquidity pump and ended with the yen lower than a penny, the PBC cutting the exchange rate of the yuan and Ben Bernanke headed to Chicago to reverse the bearish sentiment unleashed by Philly FedHead Charles Plosser on Thursday.

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Stocks were unable to remain in positive territory on Thursday despite the report from the Department of Labor indicating that initial unemployment claims for the week ending May 4 dropped to 323,000.  It was the lowest weekly level for initial claims since 2008.  Economists had been expecting initial claims to increase to 335 thousand.  Last week’s initial figure of 324,000 was revised upward to 327,000.  The 4-week moving average fell to the lowest it has been since December of 2007.  Another 5-Year Low for Jobless Claims

From the report:

In the week ending May 4, the advance figure for seasonally adjusted initial claims was 323,000, a decrease of 4,000 from the previous week’s revised figure of 327,000. The 4-week moving average was 336,750, a decrease of 6,250 from the previous week’s revised average of 343,000.

Stunning Demographic Trends in Unemployment

Also on Thursday, the National Association of Home Builders (NAHB) released its NAHB 55+ Single Family Housing Market Index for the first quarter of 2013.  The NAHB started this index in 2008 to measure builder confidence in the housing market for people aged 55 and older.  Results are released on a quarterly basis with two HMIs:  One for single family homes and the other for multifamily condominiums.  A result below 50 indicates that conditions are considered more poor than good.

From the report:

All of the components of the 55+ single-family HMI showed significant growth from a year ago: present sales climbed 19 points to 46, expected sales for the next six months increased 21 points to 53 and traffic of prospective buyers rose 15 points to 41.

The 55+ multifamily condo HMI posted a substantial gain of 23 points to 38, which is the highest first-quarter reading since the inception of the index. All 55+ multifamily condo HMI components increased compared to a year ago as present sales rose 23 points to 37, expected sales for the next six months climbed 23 points to 43 and traffic of prospective buyers rose 23 points to 38.

The major ETFs expected to respond to the Department of Labor’s report on initial unemployment claims and the NAHB 55+ Single Family Housing Market Index are:

Consumer Staples Select Sector SPDR ETF (NYSEARCA:XLP):  -0.70%

SPDR S&P Retail ETF (NYSEARCA:XRT):  -0.03%

Consumer Discretionary Select Sector SPDR ETF (NYSEARCA:XLY):  +0.14%

SPDR S&P Homebuilders ETF (NYSEARCA:XHB):  +0.22%

Vanguard REIT ETF (NYSEARCA:VNQ):  -0.67%

Bottom line:  The unexpected drop in weekly initial unemployment claims was not enough to keep stocks in positive territory on Thursday after Philadelphia Federal Reserve president Charles Plosser announced that he would advocate for attenuation of the quantitative easing program at the June 18 FOMC meeting. 

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The markets were off to new record-breaking territory on Thursday.  With approximately two hours left in the trading session, widespread reporting focused on the remarks of Philadelphia Federal Reserve president Charles Plosser.  On Thursday, Plosser explained that he would join forces with Kansas City FedHead Esther George to advocate attenuation of the quantitative easing program at the June 18 FOMC meeting.  Since the stock market has been so dependent on quantitative easing, fear that the punchbowl would be removed boosted market volatility, causing the VIX to jump from 12.82 to 13.52 in a period of 34 minutes, beginning at 2:28 EDT.  The major stock indices fell into the red.  A Reversal Day- Is There More Downside to Come?

After remaining significantly below its 50-day moving average since last Friday, the VIX finished Thursday’s trading session at 13.13, just below its 50-day MA of 13.51.  The VIX briefly broke above its 50-day MA for the first time in a week.  Despite Thursday’s advance, the chart reveals that the 50-day moving average is continuing on a downward trajectory, moving further below the 200-day moving average.  Its Relative Strength Index advanced from Wednesday’s 45.02 to 47.58.  However, both the MACD and the signal line are continuing their trajectory below the zero line, which usually signals a further decline.  Daily Market Commentary:  Channel Resistance

VIX ETF Update:

Volatility Index – New Methodology (VIX): Index: 13.13,  +3.71%,

iPath S&P 500 VIX Short-Term Futures ETN (NYSEARCA:VXX):  +1.81%, This ETN is designed to track volatility in the markets as measured by the Chicago Board Options Exchange Market Volatility Index (CBOE Index), a popular measure of the implied volatility of S&P 500 index options.  The CBOE Volatility Index is also known as the “fear” index or “fear” indicator in markets.  The iPath S&P 500 VIX Short-Term Futures ETN (NYSEARCA:VXX) prices itself off of the average and implied volatility of the first two months of futures contracts of the S&P 500 Index.

VelocityShares Daily 2X VIX Short-Term ETN (NYSEARCA:TVIX):  +3.08%,  This ETN is designed to track 2X return on volatility in the markets as measured by the S&P 500 VIX Short-Term Futures Index.  The S&P 500 VIX Short-Term Futures Index measures the volatility of the S&P 500 Index via futures contracts as traded on the CBOE.

iPath S&P 500 VIX Mid-Term Futures ETN (NYSEARCA:VXZ):  +1.42%, This ETN is designed to track volatility in the markets as measured by the CBOE Volatility Index futures contracts.  The CBOE Volatility Index is also known as the “fear” index or “fear” indicator in markets.  The iPath S&P 500 VIX Mid-Term Futures ETN (NYSEARCA:VXZ) is priced from the average volatility of the 4^th through 7^th month futures contracts of the S&P 500 Index as traded on the CBOE.

S&P 500 Dynamic VIX ETN (NYSEARCA:XVZ):  +0.52%, This ETN is designed to track volatility in the markets as measured by the S&P 500 Dynamic VIX Futures Total Return Index.  The S&P 500 Dynamic VIX Futures Total Return Index seeks to combine results of volatility of the S&P 500 VIX Short-Term Futures Index Excess Return and the S&P 500 VIX Mid-Term Futures Index Excess Return to create an accurate market volatility reading, as measured by the CBOE.

Velocity Shares Daily Inverse VIX Short-Term ETN (NYSEARCA:XIV):  -2.03%, This ETN is designed to inversely track the volatility in the markets as measured by the S&P 500 VIX Short-Term Futures Index.  The S&P 500 VIX Short-Term Futures Index measures the volatility of the S&P 500 Index via futures contracts traded on the CBOE.

Bottom line:  Stock market volatility got a boost on Thursday when Philadelphia Federal Reserve President Charles Plosser announced that he would advocate attenuation of the program at the next FOMC meeting.  The news sent the VIX jumping  from 12.82 to 13.52 in 34 minutes.    

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The Dow Jones Industrial Average extended its residence in the 15,000 range on Thursday as it continued beyond 15,100.  After reaching a new record intraday high of 15,144.83 at 1:48 EDT, the Dow ran out of fuel at 2:28, when a head-and-shoulders pattern took shape on the chart, sending many investors running for the exits

The S&P 500 followed a similar course, fading from an intraday record high during the last 90 minutes of the session.  Philadelphia Federal Reserve president Charles Plosser was to blame for the buzzkill, after his statement that he would join forces with Kansas City FedHead Esther George to advocate attenuation of the quantitative easing program at the June 18 FOMC meeting.

The day got off to a good start because the Department of Labor reported that initial unemployment claims fell to 323,000 despite expectations of an increase to 335,000.

Thursday brought some big winners.  Ocean Power Technologies (NASDAQ:OPTT) skyrocketed 33.78 percent after Ascendiant Capital Markets initiated coverage on the stock as a “Strong Buy”.  Green Mountain Coffee Roasters (NASDAQ:GMCR) soared 27.84 percent after the company raised its profit forecast for the fiscal year ending in September from $2.82 per share to $3.15 per share due to the popularity of its K-Cup product line.

One of the most shorted stocks on the market, Tesla Motors (NASDAQ:TSLA) reported adjusted quarterly earnings of 12 cents per share, running over expectations of only 3 cents per share.  It was Tesla’s first profitable quarter.  Thursday’s trading session resulted in a massive short squeeze, on the very day when Consumer Reports announced that the Tesla Model S had achieved its highest score ever: 99.  Although the same score was achieved by the Lexus LS460 in 2009, Consumer Reports has described the Tesla as the best car it ever tested.  Tesla’s share price finished the session with a gain of 24.40 percent.

The Dow Jones Industrial Average (NYSEARCA:DIA) lost 22 points to finish Thursday’s trading session at 15,082.62 for a 0.15 percent decline.  Nevertheless, the Dow reached a new record intraday high of 15,144.83.  The S&P 500 (NYSEARCA:SPY) declined 0.37 percent to close at 1,626.67 after setting a new intraday record high of 1,635.01.

The Nasdaq 100 (NASDAQ:QQQ) fell 0.24 percent to 2,961.  The Russell 2000 (NYSEARCA:IWM) dropped 0.43 percent to end the day at 966.

In other major markets, oil (NYSEARCA:USO) declined 0.67 percent to close at $34.17.

On London’s ICE Futures Europe Exchange, June futures for Brent crude oil  advanced by 5 cents (0.05 percent) to $104.08/bbl. (NYSEARCA:BNO).

Read “Oil Service Stocks Hit an Oil Slick”

June gold futures declined by $16.30 (1.11 percent) to $1,457.40 per ounce (NYSEARCA:GLD).

Transports stalled out on Thursday, with the Dow Jones Transportation Index (NYSEARCA:IYT) sinking 1.11 percent.

European stocks had a lackluster day on Thursday.  The Euro STOXX 50 Index finished Thursday’s trading session with a 0.41 percent drop to 2,773 – remaining above its 50-day moving average of 2,665.

Read “British Stocks Advance as Industrial Production Rises”

In Japan, stocks were off to a good start earlier in the day although they sank during the final three hours of the session as the yen picked up some strength.  A stronger yen results in less-competitive prices for Japanese exports in foreign markets (NYSEARCA:FXY).  The Nikkei 225 Stock Average declined 0.66 percent to 14,191 (NYSEARCA:EWJ).  After the closing bell in Tokyo, the yen sank against the dollar.  “Yenny watch” has finally reached a climax as the currency is now worth less than one cent, trading at 100.7 per dollar.

In China, stocks declined after the National Bureau of Statistics reported that producer prices fell 2.6 percent in April due to weakening demand.  The result confirmed fears that the nation’s economy is getting soft.  The Shanghai Composite Index declined 0.59 percent to 2,232 (NYSEARCA:FXI).  Hong Kong’s Hang Seng Index dipped 0.14 percent to 23,211 (NYSEARCA:EWH).

Technical indicators reveal that the S&P 500 remains far above its 50-day moving average of 1,567 after closing at 1,626.67 – motivating bears to hope that we are watching the formation of a head-and-shoulders pattern, which would signal a decline.  Its Relative Strength Index declined from 68.58 to 65.54 – further below the threshold level of 70.  Most investors consider a Relative Strength Index above 70 as an “overbought” signal.  The MACD remains above the signal line, suggesting the likelihood of a further advance.  Nevertheless the trajectory of the MACD has flattened while the signal line is ascending.

Read “An Indispensable Tool for Tracking Market Trends”

For the day, most sectors finished in negative territory except for the healthcare and consumer discretionary sectors, which made modest advances.  The utilities sector trailed the group.

Consumer Discretionary (NYSEARCA:XLY):  +0.14%

Technology:  (NYSEARCA:XLK):  -0.28%

Industrials (NYSEARCA:XLI):  -0.02%

Materials: (NYSEARCA:XLB):  -0.15%

Energy (NYSEARCA:XLE):  -0.11%

Financials: (NYSEARCA:XLF):  -0.73%

Utilities (NYSEARCA:XLU):  -1.51%

Health Care: (NYSEARCA:XLV):  +0.17%

Consumer Staples (NYSEARCA:XLP):  -0.70%

Bottom line:  The importance of the quantitative easing program stock market performance became apparent on Thursday after Philly Federal Reserve President Charles Plosser announced that he would advocate attenuation of the program at the next FOMC meeting.  The major stock indices headed south after widespread publication of Plosser’s remarks. 

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Britain’s Office for National Statistics reported on Thursday that the nation’s industrial production increased by 0.7 percent in March, beating economists’ expectations of a 0.2 percent rise (NYSEARCA:EWU).  On a quarterly basis, production output rose by 0.3 percent during the first quarter of 2013.  British stocks made a modest advance as it was a generally lackluster trading day in Europe (NYSEARCA:VGK).  GBP/USD Drops on U.S. Jobless Claims, BoE Decision

The Euro STOXX 50 Index finished Thursday’s trading session with a 0.41 percent drop to 2,773 – remaining above its 50-day moving average of 2,665.  After breaking above its overhead resistance level of 2,700 on January 21, the STOXX 50 immediately retreated and spent the next three months trying to surpass that barrier.  Its Relative Strength Index is 67.0 (NYSEARCA:FEZ).  The FTSE 100 Index rose 0.14 percent to 6,592 (NYSEARCA:EWU).

The German DAX Index advanced 0.16 percent to 8,262 (NYSEARCA:EWG).  France’s CAC 40 Index fell 0.70 percent to 3,928 (NYSEARCA:EWQ).  Spain’s IBEX 35 Index declined 0.28 percent to 8,572 (NYSEARCA:EWP).  Italy’s FTSE MIB Index sank 0.96 percent to 17,090 (NYSEARCA:EWI).

As of 2:44 EDT, the euro declined 0.87 percent against the dollar, trading at $1.3039 (NYSEARCA:FXE).

Spain’s ten-year bond yield climbed to 4.18 percent on Thursday from Wednesday‘s closing level of 4.09 percent (NYSEARCA:EWP).  Spain’s two-year bond yield rose to 1.63 percent on Thursday from Wednesday‘s closing level of 1.58 percent (NYSEARCA:EWP).

Italy’s ten-year bond yield advanced to 3.86 percent on Thursday from Wednesday‘s closing level of 3.81 percent (NYSEARCA:EWI).

On London’s ICE Futures Europe Exchange, June futures for Brent crude oil  declined by 17 cents (0.16 percent) to $103.86/bbl. (NYSEARCA:BNO, NYSEARCA:USO).

June gold futures declined by $12.50 (0.85 percent) to $1,461.20 per ounce (NYSEARCA:GLD).  China Buys Gold

In China, stocks declined after the National Bureau of Statistics reported that producer prices fell 2.6 percent in April due to weakening demand.  The result confirmed fears that the nation’s economy is getting soft.  The Shanghai Composite Index declined 0.59 percent to 2,232 (NYSEARCA:FXI).  Hong Kong’s Hang Seng Index dipped 0.14 percent to 23,211 (NYSEARCA:EWH).

In Japan, stocks were off to a good start earlier in the day, although they sank during the final three hours of the session as the yen picked up some strength.  A stronger yen results in less-competitive prices for Japanese exports in foreign markets (NYSEARCA:FXY).  After the closing bell in Tokyo, the yen sank against the dollar.  The Nikkei 225 Stock Average declined 0.66 percent to 14,191 (NYSEARCA:EWJ).

American stock index futures held close to the breakeven level ahead of Thursday’s opening bell despite an unexpected drop in the number of initial unemployment claims, as investors wondered whether the current rally still has “legs”.  The June 13 Dow Jones Industrials future dipped 0.03 percent to 15,057 as of 9:14 EDT.  The June 13 S&P 500 future declined 0.05 percent to 1,627 (NYSEARCA:SPY).  The June 13 Nasdaq 100 future retreated 0.19 percent to 2,956.

Bottom line:  Britain’s Office for National Statistics demonstrated why the nation was able to avoid a triple-dip recession, with the release of its industrial production report, indicating that production output rose 0.2 percent during the first quarter of 2013 due to a 0.7 percent surge in March.

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On Wednesday, the Mortgage Bankers Association released its weekly report on Mortgage Purchase Applications for the week ending May 3.  The report disclosed that mortgage applications surged by 7 percent from the previous week, giving a boost to the SPDR S&P Mortgage Finance ETF (NYSEARCA:KRE). The Refinance Index jumped 8 percent from the prior week to its highest level since December of 2012.  By no coincidence, the average contract interest rate for 30-year fixed-rate mortgages decreased to 3.59 percent, the lowest rate since December 2012.

The report concerns mortgages for refinancing as well has home purchases.  The database includes over 75 percent of the applications for retail residential mortgages in the United States.  Discipline Binds It All Together

The amount of mortgage activity for refinancing increased to 76 percent from the previous week’s 75 percent.  Why I Feel Like It’s 2007 All Over Again

From the report:

Mortgage applications increased 7.0 percent from one week earlier, according to data from the Mortgage Bankers Association’s (MBA) Weekly Mortgage Applications Survey for the week ending May 3, 2013. 

The Market Composite Index, a measure of mortgage loan application volume, increased 7.0 percent on a seasonally adjusted basis from one week earlier.  On an unadjusted basis, the Index increased 7 percent compared with the previous week.  The Refinance Index increased 8 percent from the previous week to the highest level since December 2012.  The gain in the Refinance Index was due to increases in both the conventional and government refinance indices of 8.8 percent and 5.7 percent respectively. The seasonally adjusted Purchase Index increased 2 percent from one week earlier to the highest level since May 2010. The unadjusted Purchase Index increased 3 percent compared with the previous week and was 12 percent higher than the same week one year ago.

The refinance share of mortgage activity increased to 76 percent of total applications from 75 percent the previous week to the highest level since February 2013. The adjustable-rate mortgage (ARM) share of activity increased to 4 percent of total applications. The HARP share of refinance applications fell from 34 percent last week to 30 percent this week. The government share of purchase applications declined to 29.1 percent, which is a two year low.

The average contract interest rate for 30-year fixed-rate mortgages with conforming loan balances ($417,500 or less) decreased to 3.59 percent, the lowest rate since December 2012, from 3.60 percent, with points increasing to 0.33 from  0.30 (including the origination fee) for 80 percent loan-to-value ratio (LTV) loans.  The effective rate increased from last week.  

The major ETFs expected to respond to the Mortgage Purchase Applications report are:

SPDR S&P Mortgage Finance ETF (NYSEARCA:KME):  +0.69%

iShares Dow Jones US Real Estate ETF (NYSEARCA:IYR):  +0.24%

Vanguard REIT ETF (NYSEARCA:VNQ):  +0.05%

SPDR S&P Regional Banking ETF (NYSEARCA:KRE):  +0.03%

iShares Dow Jones US Financial Sector Index ETF (NYSEARCA:IYF):  +0.65%  Learn More About iShares ETFs

Bottom line:  The latest Mortgage Purchase Applications report from the Mortgage Bankers Association disclosed that its Refinance Index jumped 8 percent in one week, reaching its highest level since December of 2012, thanks to an interest rate drop to the level from that same month.  Proponents of quantitative easing will obviously cite this report as further evidence of the benefits from the Fed’s liquidity pump.

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For VIX investors, the technical indicators for the “fear index” are getting scary again.  After holding directly below its 50-day moving average for over a week, the VIX finished Friday’s trading session at 12.85, significantly below its 50-day MA.  VIX has been stuck at that level all week.  Its Relative Strength Index declined from Tuesday’s 45.77 to 45.02.  More important, the MACD is continuing its trajectory below the zero line, which usually signals a further decline.  Beyond that, the signal line has now crossed below the zero line, for another ominous signal.  The chart reveals that the 50-day moving average has now assumed a more downward trajectory, moving further below the 200-day moving average.  Count that as scary indicator number three.

Stock market volatility remains in the same range where it has been since the beginning of the year.  Many VIX investors have felt that as the rally played out, market volatility would steadily increase.  Instead, what we have seen are intermittent bursts of volatility, followed by a decline of the VIX to the level just above 12.  On previous occasions when both the MACD and the signal line have fallen below the zero line, they remained there for over a month.  Accordingly, the recent decline of the signal line below the zero line may be of particular concern to VIX investors.  WTF Is Going on in Stocks … Yes – Watch the Flows!!!

A review of the S&P 500 chart reveals that although the S&P 500 remains above its 50-day moving average of 1,565 with another record-high close at 1,632.69, there exists the possibility that that we are watching the formation of a head-and-shoulders pattern, which would signal a decline.  The Relative Strength Index has now reached 68.58.  Once the RSI rises above 70, it will be in the “overbought” range.  As a result, many investors might take this as a signal to take profits and retreat to the sidelines.  Such a scenario could not only boost market volatility, but it would also facilitate the formation of a head-and-shoulders pattern on the S&P chart.  If a “right shoulder” begins to take shape at that point, another wave of investors could head for the exits, increasing volatility.  Still Above 1597 …

VIX ETF Update: 

Volatility Index – New Methodology (VIX): Index: 12.66,  -1.33%,

iPath S&P 500 VIX Short-Term Futures ETN (NYSEARCA:VXX):  +0.66%

VelocityShares Daily 2X VIX Short-Term ETN (NYSEARCA:TVIX):  +0.78%

 iPath S&P 500 VIX Mid-Term Futures ETN (NYSEARCA:VXZ):  +0.46%

S&P 500 Dynamic VIX ETN (NYSEARCA:XVZ):  -0.05%

Velocity Shares Daily Inverse VIX Short-Term ETN (NYSEARCA:XIV):  -0.58%

Bottom line:  Despite the indicators on the VIX chart, suggesting the likelihood of a further decline, the S&P 500 chart could be setting up a head-and-shoulders pattern.  As the S&P’s relative strength index approaches the “overbought” range, we could see some equity outflows which complete the formation of the head-and-shoulders pattern, sending investors running for the exits and boosting the VIX.   

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With major U.S. equity indexes setting new highs, some investors may be bracing for a major correction downward.

To hedge their equity positions, these investors may be tempted to reach for a VIX-based product. Products based on the CBOE Volatility Index, or VIX, are often used as equity hedges because the VIX and the S&P 500 Index tend to move in opposite directions.

However, a recent Bloomberg piece noted that this relationship—the strongly negative correlation between the VIX and the S&P 500—may be weakening.

The VIX may be the market’s leading measure of volatility and its mechanics are interesting, but they’re not actionable. Investors can’t access the VIX index—it’s uninvestable. Instead they gain exposure to it using VIX futures.

But VIX futures offer an imperfect vehicle for VIX index exposure due to the shape of the futures curve— as has been noted ad nauseum by analysts and bloggers, including me.

All this is preamble. When I saw the Bloomberg article, I immediately wanted to know whether correlations between VIX futures products and the S&P 500 had changed.

Cut To The Chase

Correlations change all the time. Here’s a graph of rolling correlations between the iPath S&P 500 VIX Short-Term Futures ETN (NYSEArca: VXX) and the SPDR S&P 500 ETF (NYSEArca: SPY). I used a 22-trading-day rolling period, equal to a calendar month. That’s a short window, but one that’s realistic for a tactical hedge using VIX futures products. On the chart, values approaching -1 (at the bottom) are ideal for hedging purposes.

While the chart doesn’t show a clear trend that negative correlation has decreased recently, it does show that correlations are increasingly unstable in 2013. The hedging power of VXX lies in strong negative correlation, and when this aspect of performance is less reliable, the hedge is less reliable as well.

I also ran rolling correlations over a longer time frame, namely 63 trading days or one calendar quarter. As you’d expect, the longer look-back shows a smoother line. And the weakest correlation is -0.69 for 63 days vs. -0.39 for 22 days.

This implies that holding VXX for a quarter rather than a month gives more hedging power. However, this approach creates another risk, namely the tendency for VXX as a stand-alone product to lose money even faster than Uncle Sam can print it. (VXX is down 73.2 percent over the past 12 months.)

This makes me think that a one-quarter look-back period is too long, and that the big money is in VXX for a few days rather than a few months. This notion is reinforced by VXX’s breathtaking turnover ratio (assets divided by average daily dollar volume) that’s roughly equal to 1. Yes, it turns over its entire $1 billion in just in a day or two.

All this suggests that VXX makes a wobbly and expensive hedge. And it is. But there’s one caveat in VXX’s favor, the one that probably drives the $1 billion daily trading volume in a security with a well-documented and persistent tendency to destroy long-term investor wealth.

The caveat is that the changing correlation theme cuts both ways. I would fully expect VXX to shoot up quickly if a horrible headline sends major equity indexes into the cellar. In other words, it’s likely to achieve perfectly negative correlation just when it’s most needed.

One last note: Correlation is all about direction, not scale. Treasurys will also show strong negative correlation when equity markets tank, but they won’t increase with the same magnitude that VXX will if black swans darken the sky.

Data info: Correlations are based on daily log returns from VXX’s indicative value and SPY’s NAV. Rolling correlation end-dates ranged from May 7, 2012 to May 7, 2013 using data from Bloomberg.

At the time this article was written, the author held no positions in the securities mentioned. Contact Paul Britt at pbritt@indexunivers.com.

The Dow Jones Industrial Average had an opportunity to get comfortably established in the 15,000 range on Wednesday as it continued beyond 15,100.  The other major stock indices headed higher as the flow of better-than-expected earnings reports continued.  Whole Foods (NASDAQ:WFM) made a healthy ten percent advance after its quarterly earnings of 76 cents per share beat expectations of 74 cents.

Computer game manufacturer Electronic Arts (NASDAQ:EA) gave a forecast of adjusted earnings for its fiscal year, ending in March, of $1.20 per share, zapping expectations of $1.10 per share.  EA’s share price advanced to the next level with a 17-percent gain at Wednesday’s closing bell.

After the closing bell, Tesla Motors (NASDAQ:TSLA) reported adjusted quarterly earnings of 12 cents per share, running over expectations of only 3 cents per share.  It was Tesla’s first profitable quarter.  After-hours trading sent the company’s share price for a ride on one of CEO Elon Musk’s rockets, soaring more than 26 percent higher than the $55.79 at Wednesday’s closing bell.

The Dow Jones Industrial Average (NYSEARCA:DIA) gained 48 points to finish Wednesday’s trading session at a new record-high of 15,105.12 for a 0.32 percent advance.  The Dow reached a new record intraday high of 15,106.81.  The S&P 500 (NYSEARCA:SPY) advanced 0.41 percent to close at yet another record high of 1,632.69 after setting a new intraday record high of 1,632.78.

The Nasdaq 100 (NASDAQ:QQQ) climbed 0.52 percent to 2,968.  The Russell 2000 (NYSEARCA:IWM) advanced 0.27 percent to end the day at 970.

In other major markets, oil (NYSEARCA:USO) advanced 1.15 percent to close at $34.40.

On London’s ICE Futures Europe Exchange, June futures for Brent crude oil  declined by 11 cents (0.11 percent) to $103.96/bbl. (NYSEARCA:BNO).

June gold futures  advanced by $23.70 (1.64 percent) to $1,472.50 per ounce (NYSEARCA:GLD).

Read “Time to Invest in Platinum ETFs?”

Transports continued to get good mileage on Wednesday, with the Dow Jones Transportation Index (NYSEARCA:IYT) rising 0.29 percent.

European stocks advanced on Wednesday, as fears eased concerning the possibility that Germany may have entered a recession with the rest of the Eurozone (NYSEARCA:VGK).  Wednesday’s report from Destatis indicated that Germany’s industrial production increased by 1.2 percent in March on a month-over-month basis (NYSEARCA:EWG).  The Euro STOXX 50 Index finished Wednesday’s trading session with a 0.56 percent climb to 2,784 – remaining above its 50-day moving average of 2,662.

Read “European Stock Prices Jump on Good News from Germany”

In Japan, stocks made a big advance as the yen dropped as low as 99.14 per dollar during Wednesday’s trading session in Japan.  “Yenny watch” has resumed as the exchange rate for the yen approaches one cent – at which point it will become the yenny.  A weaker yen results in more-competitive prices for Japanese exports in foreign markets (NYSEARCA:FXY).  The Nikkei 225 Stock Average surged 0.74 percent to 14,285 (NYSEARCA:EWJ).

In China, stocks advanced following the release of the highly-controversial April trade balance report from the General Administration of Customs in Beijing.  The report’s boast of a 14.7 percent increase in exports has been widely criticized by analysts from Nomura, Bank of America and Mizuho Securities because most of the reported exports could be explained by a 57-percent increase in shipments to Hong Kong, which were allegedly conducted as an obfuscation tactic to conceal capital flows into China.  The Shanghai Composite Index advanced 0.48 percent to 2,246 (NYSEARCA:FXI).  Hong Kong’s Hang Seng Index climbed 0.86 percent to 23,244 (NYSEARCA:EWH).

Technical indicators reveal that the S&P 500 is climbing further above its 50-day moving average of 1,565 after hitting a new record-high close of 1,632.69 – motivating bears to hope that we are watching the formation of a head-and-shoulders pattern, which would signal a decline.  Its Relative Strength Index advanced from 66.99 to 68.58 – just below the threshold level of 70.  Most investors consider a Relative Strength Index above 70 as an “overbought” signal.  The MACD continues to make a further break above the signal line, suggesting the likelihood of a further advance.

Read “Will We Hold It Wednesday – Dow 15,000 Edition”

For the day, all sectors finished solidly in positive territory except for the utilities sector, which fell back into the red by 88 basis points.  The materials, financial and technology sectors led the group.

Consumer Discretionary (NYSEARCA:XLY):  +0.07%

Technology:  (NYSEARCA:XLK):  +0.80%

Industrials (NYSEARCA:XLI):  +0.63%

Materials: (NYSEARCA:XLB):  +0.87%

Energy (NYSEARCA:XLE):  +0.16%

Financials: (NYSEARCA:XLF):  +0.81%

Utilities (NYSEARCA:XLU):  -0.88%

Health Care: (NYSEARCA:XLV):  +0.29%

Consumer Staples (NYSEARCA:XLP):  +0.12%

Bottom line:  Earnings reports continue to fuel the ongoing stock market rally, which – according to Nouriel Roubini (a/k/a Dr. Doom) – could go on for another year or two before the next crash. 

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Wednesday’s report from Destatis, indicating that Germany’s industrial production increased by 1.2 percent in March (on a month-over-month basis) eased fears that the nation may have entered a recession with the rest of the Eurozone (NYSEARCA:EWG).  The news sent European stock prices on a robust advance (NYSEARCA:VGK).  Germany has yet to report on its first-quarter GDP.  Because Germany’s fourth-quarter 2012 GDP contracted by 0.4 percent, negative GDP for the first quarter will mean that the nation has entered economic recession.  EUR/JPY Gains on Surging German Output Data

The Euro STOXX 50 Index finished Wednesday’s trading session with a 0.56 percent climb to 2,784 – remaining above its 50-day moving average of 2,662.  After breaking above its overhead resistance level of 2,700 on January 21, the STOXX 50 immediately retreated and spent the next three months trying to surpass that barrier.  Its Relative Strength Index is 64.98 (NYSEARCA:FEZ).  The FTSE 100 Index advanced 0.40 percent to 6,583 (NYSEARCA:EWU).

The German DAX Index surged 0.83 percent to 8,249 (NYSEARCA:EWG).  France’s CAC 40 Index advanced 0.89 percent to 3,956 (NYSEARCA:EWQ).  Spain’s IBEX 35 Index rose 0.62 percent to 8,597 (NYSEARCA:EWP).  Italy’s FTSE MIB Index climbed 0.78 percent to 17,255 (NYSEARCA:EWI).

As of 1:59 EDT, the euro advanced 0.65 percent against the dollar, trading at $1.3164 (NYSEARCA:FXE).  Dollar Turns Lower as German Data Buoys Sentiment

Spain’s ten-year bond yield declined to 4.08 percent on Wednesday from Tuesday’s closing level of 4.10 percent (NYSEARCA:EWP).  Spain’s two-year bond yield dipped to 1.58 percent on Wednesday from Tuesday’s closing level of 1.59 percent (NYSEARCA:EWP).

Italy’s ten-year bond yield declined to 3.81 percent on Wednesday from Tuesday’s closing level of 3.84 percent (NYSEARCA:EWI).

On London’s ICE Futures Europe Exchange, June futures for Brent crude oil  advanced by 3 cents (0.03 percent) to $104.10/bbl. (NYSEARCA:BNO, NYSEARCA:USO).

June gold futures  advanced by $23.50 (1.62 percent) to $1,472.30 per ounce (NYSEARCA:GLD).

In China, stocks advanced following the release of the highly-controversial April trade balance report from the General Administration of Customs in Beijing.  The report’s boast of a 14.7 percent increase in exports has been widely criticized by analysts from Nomura, Bank of America and Mizuho Securities because most of the reported exports could be explained by a 57-percent increase in shipments to Hong Kong, which were allegedly conducted as an obfuscation tactic to conceal capital flows into China.  The Shanghai Composite Index advanced 0.48 percent to 2,246 (NYSEARCA:FXI).  Hong Kong’s Hang Seng Index climbed 0.86 percent to 23,244 (NYSEARCA:EWH).

Japanese stocks made a big advance as the yen dropped as low as 99.14 per dollar during Wednesday’s trading session in Japan.  A weaker yen results in more-competitive prices for Japanese exports in foreign markets (NYSEARCA:FXY).  The Nikkei 225 Stock Average surged 0.74 percent to 14,285 (NYSEARCA:EWJ).

American stock index futures held close to the breakeven level ahead of Wednesday’s opening bell as investors hoped that the momentum from Tuesday’s advance would continue.  The June 13 Dow Jones Industrials future slipped 0.07 percent to 14,972 as of 9:14 EDT.  The June 13 S&P 500 future declined 0.14 percent to 1,618 (NYSEARCA:SPY).  The June 13 Nasdaq 100 future dipped 0.03 percent to 2,945.

Bottom line:  The major European stock indices advanced on Wednesday as fears began to ease concerning the possibility that Germany may have entered a recession. The report from Destatis on German industrial production during April indicated a 1.2 percent increase. 

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On Tuesday, the Department of Labor’s Bureau of Labor Statistics released its Job Openings and Labor Turnover Survey (JOLTS) for March.  The report disclosed that the number of job openings decreased to 3.8 million in March, compared with February’s 3.9 million openings.  The February figure was revised upward from 3.6 million openings.  As a result, the March initial figure was an improvement from February’s initial figure.  If the March total is revised upward to even one-half the extent February’s figure was revised, the final March figure will represent an improvement from February’s total.  .  Investors failed to exhibit a significant reaction to the report.  Although the major stock indices made slight declines after the report’s release at 10:00, they quickly began to rebound.  Daily Market Commentary: Small Caps Gain

Keep in mind that this report is based on the month of March, as opposed to the non-farm payrolls report, which was based on the month of April.  The term “separations” refers to situations where employees left their jobs voluntarily.

From the report:

There were 3.8 million job openings on the last business day of March, little changed from 3.9 million in February, the U.S. Bureau of Labor Statistics reported today. The hires rate (3.2 percent) and separations rate (3.1 percent) were little changed in March. This release includes estimates of the number and rate of job openings, hires, and separations for the nonfarm sector by industry and by geographic region.

*   *   *

Over the 12 months ending in March 2013, hires totaled 51.8 million and separations totaled 50.1 million, yielding a net employment gain of 1.7 million. These figures include workers who may have been hired and separated more than once during the year.

Also on Tuesday, the Federal Reserve released its Consumer Credit report for March.  According to the report consumer credit increased by only $7.97 billion in March, which was approximately half of the $16 billion anticipated by economists.  Non-revolving credit, such as auto loans and tuition loans from the government, increased by just over $9 billion in March, compared with nearly twice that much in February.  Dow 20,000 The Next Big Number Is Not Much of a Reach

The major ETFs expected to respond to the Job Openings and Labor Turnover Survey (JOLTS) and the Fed’s Consumer Credit report for March are:

Consumer Staples Select Sector SPDR ETF (NYSEARCA:XLP):  +0.78%

SPDR S&P Retail ETF (NYSEARCA:XRT):  +0.99%

Consumer Discretionary Select Sector SPDR ETF (NYSEARCA:XLY):  +0.84%

iShares Russell 2000 Index ETF (NYSEARCA:IWM):  +0.78%

Vanguard Real Estate ETF (NYSEARCA:VNQ):  +0.55%

Bottom line:  Tuesday’s economic reports did little to change investor enthusiasm as the Labor Turnover Survey indicated very little change between February and March. 

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It was another strange day for the VIX as it managed to make a 1.34 percent advance despite the fact that the S&P 500 advanced 0.52 percent to close at yet another record high of 1,625.96 after setting a new intraday record high of 1,626.03.  The fact that the Dow Jones Industrial Average finally closed above 15,000 for the first time did not reduce stock market volatility enough to prevent the VIX from making a significant advance.  Nevertheless, all of the other VIX ETPs finished in the red, with the exception of the Velocity Shares Daily Inverse VIX Short-Term ETN (NYSEARCA:XIV).  Big Day for the Blue Chips

After holding directly below its 50-day moving average for over a week, the VIX finished Friday’s trading session at 12.85, significantly below its 50-day moving average.  Monday’s decline to 12.66 kept the VIX at approximately the same distance from the 50-day MA and Tuesday’s advance to 12.83 appears on the chart as more of a decline than an advance.  This demonstrates why it is important to use the color red on the chart for days when a security finishes at a loss.  Its Relative Strength Index increased from Monday’s 44.92 to 45.77.  More important, the MACD remains below the zero line, which usually signals a further decline.  Volatility Hits Euro ETF after Draghi Comments

VIX ETF Update: 

Volatility Index – New Methodology (VIX): Index:  12.83,  +1.34%,

iPath S&P 500 VIX Short-Term Futures ETN (NYSEARCA:VXX):  -1.03%, This ETN is designed to track volatility in the markets as measured by the Chicago Board Options Exchange Market Volatility Index (CBOE Index), a popular measure of the implied volatility of S&P 500 index options.

VelocityShares Daily 2X VIX Short-Term ETN (NYSEARCA:TVIX):  -2.64%, This ETN is designed to track 2X return on volatility in the markets as measured by the S&P 500 VIX Short-Term Futures Index.

iPath S&P 500 VIX Mid-Term Futures ETN (NYSEARCA:VXZ):  -1.31%, This ETN is designed to track volatility in the markets as measured by the CBOE Volatility Index futures contracts.

S&P 500 Dynamic VIX ETN (NYSEARCA:XVZ):  -0.69%, This ETN is designed to track volatility in the markets as measured by the S&P 500 Dynamic VIX Futures Total Return Index.

Velocity Shares Daily Inverse VIX Short-Term ETN (NYSEARCA:XIV):  +0.97%, This ETN is designed to inversely track the volatility in the markets as measured by the S&P 500 VIX Short-Term Futures Index.

Bottom line: The VIX managed to make a significant, 1.34 percent advance on the same day that the S&P 500 closed at yet another record high and the Dow Jones Industrial Average closed above 15,000 for the first time.

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After several days of anticipation, the Dow Jones Industrial Average finally closed above 15,000 as Caterpillar (NYSEARCA:CAT) crawled its way to the front with a 2.51 percent gain, while pulling the other 29 Dow components far enough across the 15,000 mark to keep them there until the closing bell.

Although the S&P 500 had its usual record-breaking day, the Nasdaq 100 actually finished in the red.  The entire tech sector had a bad day as Apple (NASDAQ:AAPL), Microsoft (NASDAQ:MSFT) and Google (NASDAQ:GOOG) all fell into negative territory.  On the other hand, the stock to own on Tuesday was MercadoLibre (NASDAQ:MELI) which closed with a gain of 17.88 percent.  The “Amazon” of the Amazon beat expectations with quarterly earnings of 40 cents per share on net income of $17.5 million.

The Dow Jones Industrial Average (NYSEARCA:DIA) gained 87 points to finish Tuesday’s trading session at a record-high 15,056.20 for a 0.58 percent advance.  The S&P 500 (NYSEARCA:SPY) climbed 0.52 percent to close at yet another record high of 1,625.96 after setting a new intraday record high of 1,626.03.

The Nasdaq 100 (NASDAQ:QQQ) declined by 0.08 percent to 2,952.  The Nasdaq Composite had better luck, advancing 0.11 percent to close at 3,396.63 after setting a 12-year record intraday high of 3,402.24.  The Russell 2000 (NYSEARCA:IWM) climbed 0.84 percent to end the day at 967.

In other major markets, oil (NYSEARCA:USO) declined 0.38 percent to close at $34.01.

On London’s ICE Futures Europe Exchange, June futures for Brent crude oil  declined by $1.37 (1.30 percent) to $103.66/bbl. (NYSEARCA:BNO.)

June gold futures  declined by $17.30 (1.18 percent) to $1,450.70 per ounce (NYSEARCA:GLD).

Read “Gold and Silver Continue to Build New Base”

Transports lit the afterburner on Tuesday, with the Dow Jones Transportation Index (NYSEARCA:IYT) surging 1.60 percent.

European stocks advanced on Tuesday, as earnings reports from the financial sector beat expectations (NYSEARCA:VGK).  HSBC, Société Générale, Commerzbank and Allianz were the biggest winners.

The Euro STOXX 50 Index finished Tuesday’s trading session with a 0.67 percent climb to 2,769 – remaining above its 50-day moving average of 2,660.  After breaking above its overhead resistance level of 2,700 on January 21, the STOXX 50 immediately retreated and spent the next three months trying to surpass that barrier.

Read “European Stocks Get a Boost from Financial Sector Earnings”

In Japan, stocks soared to their highest level since June of 2008 as the stock market opened for the first time since the Golden Week holiday.  The rally was apparently motivated by Friday’s non-farm payrolls report from the United States as well as continued weakening of the yen.  The Nikkei 225 Stock Average skyrocketed an enormous 3.55 percent to 14,180 (NYSEARCA:EWJ).

In China, stocks advanced in anticipation of a favorable trade balance report which will be released on Wednesday.  The Shanghai Composite Index advanced 0.20 percent to 2,235 (NYSEARCA:FXI).  Hong Kong’s Hang Seng Index climbed 0.58 percent to 23,047 (NYSEARCA:EWH).

Technical indicators reveal that the S&P 500 is climbing further above its 50-day moving average of 1,562 after hitting a new record-high close of 1,625.96 – motivating bears to hope that we are watching the formation of a head-and-shoulders pattern, which would signal a decline.  Its Relative Strength Index advanced from 64.91 to 66.99, just below the threshold level of 70.  Most investors consider a Relative Strength Index above 70 as an “overbought” signal.  The MACD continues to make a further break above the signal line, suggesting the likelihood of a further advance.

Read “It’s an Inflated World, Just Trade It”

For the day, most sectors finished solidly in positive territory except for the technology sector, which slipped into the red by 6 basis points.  After breaking out of a losing streak, the utilities sector led the group, followed closely by the materials and industrial sectors.

Consumer Discretionary (NYSEARCA:XLY):  +0.84%

Technology:  (NYSEARCA:XLK):  -0.06%

Industrials (NYSEARCA:XLI):  +0.92%

Materials: (NYSEARCA:XLB):  +0.93%

Energy (NYSEARCA:XLE):  +0.72%

Financials: (NYSEARCA:XLF):  +0.52%

Utilities (NYSEARCA:XLU):  +0.97%

Health Care: (NYSEARCA:XLV):  +0.32%

Consumer Staples (NYSEARCA:XLP):  +0.78%

Bottom line:  Despite the fact that the tech sector had a bad day, all other sectors rallied, sending the Dow Jones Industrial Average to its first close above 15,000 as the S&P 500 set new records for intraday and closing highs. 

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European stocks advanced on Tuesday, as earnings reports from the financial sector beat expectations (NYSEARCA:VGK).  HSBC, Société Générale, Commerzbank and Allianz were the biggest winners.

The upbeat earnings reports from the European financial sector accompanied good news from Germany.  Destatis reported that industrial orders in Germany rose during March by 2.2 percent, despite economists’ expectations for a 0.6 percent decline (NYSEARCA:EWG).  The report was well-received as a signal that Germany’s first quarter GDP may have risen into positive territory, keeping the country out of recession.

On the other hand, the French National Institute of Statistics and Economic Studies (INSEE) reported that the nation’s manufacturing output decreased by exactly one percent during March and that industrial production as a whole declined by 0.9 percent during the month (NYSEARCA:VNQ).

The Euro STOXX 50 Index finished Tuesday’s trading session with a 0.67 percent climb to 2,769 – remaining above its 50-day moving average of 2,660.  After breaking above its overhead resistance level of 2,700 on January 21, the STOXX 50 immediately retreated and spent the next three months trying to surpass that barrier.  Its Relative Strength Index is 63.19 (NYSEARCA:FEZ).  The FTSE 100 Index advanced 0.55 percent to 6,557 (NYSEARCA:EWU).

The German DAX Index surged 0.86 percent to 8,181 (NYSEARCA:EWG).  France’s CAC 40 Index advanced 0.37 percent to 3,921 (NYSEARCA:EWQ).  Spain’s IBEX 35 Index rose 0.47 percent to 8,544 (NYSEARCA:EWP).  Italy’s FTSE MIB Index soared 1.54 percent to 17,121 (NYSEARCA:EWI).

As of 1:27 EDT, the euro advanced 0.07 percent against the dollar, trading at $1.3085 (NYSEARCA:FXE).

Spain’s ten-year bond yield climbed to 4.09 percent on Tuesday from Monday’s closing level of 4.05 percent (NYSEARCA:EWP).  Spain’s two-year bond yield advanced to 1.58 percent on Tuesday from Monday’s closing level of 1.54 percent (NYSEARCA:EWP).

Italy’s ten-year bond yield declined to 3.79 percent on Tuesday from Monday’s closing level of 3.84 percent (NYSEARCA:EWI).

On London’s ICE Futures Europe Exchange, June futures for Brent crude oil  declined by 55 cents (0.52 percent) to $104.48/bbl. (NYSEARCA:BNO, NYSEARCA:USO).

June gold futures  declined by $19.20 (1.31 percent) to $1,448.80 per ounce (NYSEARCA:GLD).  Gold Drops as German Data Sparks Demand for U.S. Equities

In China, stocks advanced in anticipation of a favorable trade balance report which will be released on Wednesday.  The Shanghai Composite Index advanced 0.20 percent to 2,235 (NYSEARCA:FXI).  Hong Kong’s Hang Seng Index climbed 0.58 percent to 23,047 (NYSEARCA:EWH).

In Japan, stocks soared to their highest level since June of 2008 as the stock market opened for the first time since the Golden Week holiday.  The rally was apparently motivated by Friday’s non-farm payrolls report from the United States as well as continued weakening of the yen.  The yen dropped as low as 98.93 per dollar during Tuesday’s trading session in Japan.  A weaker yen results in more-competitive prices for Japanese exports in foreign markets (NYSEARCA:FXY).  The Nikkei 225 Stock Average skyrocketed by an enormous 3.55 percent to 14,180 (NYSEARCA:EWJ).  The Latest Chapter in Japan’s Amazing Market Drama

American stock index futures were in positive territory ahead of Tuesday’s opening bell as they rode the wave of momentum started by the European markets.  The June 13 Dow Jones Industrials future advanced 0.23 percent to 14,940 as of 9:13 EDT.  The June 13 S&P 500 future rose 0.17 percent to 1,616 (NYSEARCA:SPY).  The June 13 Nasdaq 100 future climbed 0.25 percent to 2,954.

Bottom line:  A better-than-expected industrial orders report from Germany helped feed investor enthusiasm in Europe as a number of the region’s banks beat earnings expectations and made huge gains.

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Most weeks, ETF flows follow some sort of a pattern: Big funds gains assets, big funds lose assets. Then there are weeks like last week where one fund has a near-7,000 percent (not a typo) increase in assets, and we are left scratching our heads.

Last Wednesday, the little-followed, largely overlooked ProShares Ultra 7-10 Year Treasury ETF (NYSEArca: UST) went from $12 million in assets under management to more than $833 million overnight.

The increase in assets of more than almost 6,000 percent overnight was enough to catch our eyes on its own, but the fact that it accompanied a 53 percent increase in assets in a similar, multibillion-dollar ETF—the iShares Barclays 3-7 Year Treasury Bond Fund (NYSEArca: IEI)—really rang the alarm bells.

In the five days through last Thursday, there were more than $2.5 billion in net creations in the two funds, and on Friday, UST had added another $240 million in assets. In other words, someone is clearly making a huge bet on these two funds that target the middle of the Treasury curve.

The UST trade is especially aggressive, considering it is part of the “Ultra” line of products from ProShares, whose promised returns are equal to two times the daily return of the reference index.

In the case of U.S. Treasurys, that means whoever is responsible for these outsized inflows is not only betting hard on a further decline in yields in the 7- to 10-year pocket of the curve, but doing so with leverage.

That may help explain why that additional $240 million in assets came into the fund between Friday and Monday as the daily reset of the most leveraged funds requires an investor to “true-up” his or her exposure due to the “path-dependent” nature of levered fund returns.

Still, it’s hard to look at these two trades in isolation given the magnitude of these inflows. When two similar, albeit different, strategies see such massive inflows, it is hard not to point fingers at institutional investors.

Institutions are the most likely candidates to put on trades of this scale, and to use product pairs—sometimes including levered and inverse—to make a play on a curve shift or in an attempt to extract volatility.

What’s curious about these trades is the timing of them. Both of the big inflows came after Federal Reserve Chairman Ben Bernanke and company’s comments were released.

In other words, the somewhat-surprising news that the Fed was willing to potentially expand monthly asset purchases as opposed to simply considering when to slow them was already public knowledge. Any short-term change in interest rates and the shape of the yield curve had likely already been baked in in the short term.

It could be—and this may be the cynic in me talking—that this large institution has some key information that the public has yet to see. After all, given the Libor scandal, revelations of early releases of labor statistics, and the now blossoming ISDA-fix inquiries, it’s hard not to at least wonder.

Then again, a couple billion of inflows into ETFs, whether they are levered or not, represents little more than a drop in the massively liquid bucket that is the market for U.S. Treasury instruments. If anyone of any real size wanted to make a bet that was based on real information, they would likely do so under the ever-so-convenient veil of the over-the-counter derivatives market.

The truth, as always, is probably somewhere in the middle. It’s likely the institution that put on this trade is betting that the Fed’s latest statement signals the central bank’s intent to buy Treasurys in the middle of the curve for as far as the eye can see.

Given the Fed’s commitment to potentially increasing the scale of asset purchases in a scenario where economic growth sputters, betting on continued yield compression in this portion of the curve makes sense.

Furthermore, since yields are already so low, it could be that the institution in question believes that any further decline in yields will be small in magnitude, and leveraging the bet on it is the only way to make the risk/reward equation palatable.

It is always a fool’s errand to try and get inside the mind of an institutional investor, especially when you have no idea which one it is, or what information it is considering.

This informational asymmetry is ultimately one of the defining characteristics of the market, particularly as it relates to fixed income. At the same time, it would be foolish to ignore such a massive inflow and not at least sit and wonder what is going on.

At the time this article was written, the author held no positions in the securities mentioned. Contact Paul Baiocchi at pbaiocchi@indexuniverse.com.

Most weeks, ETF flows follow some sort of a pattern: Big funds gains assets, big funds lose assets. Then there are weeks like last week where one fund has a near-7,000 percent (not a typo) increase in assets, and we are left scratching our heads.

Last Wednesday, the little-followed, largely overlooked ProShares Ultra 7-10 Year Treasury ETF (NYSEArca: UST) went from $12 million in assets under management to more than $833 million overnight.

The increase in assets of more than almost 6,000 percent overnight was enough to catch our eyes on its own, but the fact that it accompanied a 53 percent increase in assets in a similar, multibillion-dollar ETF—the iShares Barclays 3-7 Year Treasury Bond Fund (NYSEArca: IEI)—really rang the alarm bells.

In the five days through last Thursday, there were more than $2.5 billion in net creations in the two funds, and on Friday, UST had added another $240 million in assets. In other words, someone is clearly making a huge bet on these two funds that target the middle of the Treasury curve.

The UST trade is especially aggressive, considering it is part of the “Ultra” line of products from ProShares, whose promised returns are equal to two times the daily return of the reference index.

In the case of U.S. Treasurys, that means whoever is responsible for these outsized inflows is not only betting hard on a further decline in yields in the 7- to 10-year pocket of the curve, but doing so with leverage.

That may help explain why that additional $240 million in assets came into the fund between Friday and Monday as the daily reset of the most leveraged funds requires an investor to “true-up” his or her exposure due to the “path-dependent” nature of levered fund returns.

Still, it’s hard to look at these two trades in isolation given the magnitude of these inflows. When two similar, albeit different, strategies see such massive inflows, it is hard not to point fingers at institutional investors.

Institutions are the most likely candidates to put on trades of this scale, and to use product pairs—sometimes including levered and inverse—to make a play on a curve shift or in an attempt to extract volatility.

What’s curious about these trades is the timing of them. Both of the big inflows came after Federal Reserve Chairman Ben Bernanke and company’s comments were released.

In other words, the somewhat-surprising news that the Fed was willing to potentially expand monthly asset purchases as opposed to simply considering when to slow them was already public knowledge. Any short-term change in interest rates and the shape of the yield curve had likely already been baked in in the short term.

It could be—and this may be the cynic in me talking—that this large institution has some key information that the public has yet to see. After all, given the Libor scandal, revelations of early releases of labor statistics, and the now blossoming ISDA-fix inquiries, it’s hard not to at least wonder.

Then again, a couple billion of inflows into ETFs, whether they are levered or not, represents little more than a drop in the massively liquid bucket that is the market for U.S. Treasury instruments. If anyone of any real size wanted to make a bet that was based on real information, they would likely do so under the ever-so-convenient veil of the over-the-counter derivatives market.

The truth, as always, is probably somewhere in the middle. It’s likely the institution that put on this trade is betting that the Fed’s latest statement signals the central bank’s intent to buy Treasurys in the middle of the curve for as far as the eye can see.

Given the Fed’s commitment to potentially increasing the scale of asset purchases in a scenario where economic growth sputters, betting on continued yield compression in this portion of the curve makes sense.

Furthermore, since yields are already so low, it could be that the institution in question believes that any further decline in yields will be small in magnitude, and leveraging the bet on it is the only way to make the risk/reward equation palatable.

It is always a fool’s errand to try and get inside the mind of an institutional investor, especially when you have no idea which one it is, or what information it is considering.

This informational asymmetry is ultimately one of the defining characteristics of the market, particularly as it relates to fixed income. At the same time, it would be foolish to ignore such a massive inflow and not at least sit and wonder what is going on.

At the time this article was written, the author held no positions in the securities mentioned. Contact Paul Baiocchi at pbaiocchi@indexuniverse.com.

For the Nasdaq Composite, it was only a 12-year record intraday high which had been surpassed.  On the other hand, the S&P 500 advanced 0.19 percent to close at yet another record high of 1,617.50 after setting a new intraday record high of 1,619.77.  Nevertheless, the VIX escaped the bullish, record-setting action with only minor damage:  a retreat by only 1.48 percent.  Is Dow 22,000 Coming?

After holding directly below its 50-day moving average for over a week, the VIX finished Friday’s trading session at 12.85, significantly below its 50-day MA.  Monday’s decline to 12.66 has kept the VIX at approximately the same distance from the 50-day MA.  Its Relative Strength Index declined from Friday’s 45.66 to 44.92.  More important, the MACD has now crossed below the zero line, which usually signals a further decline.  This Pattern Suggests We Could See More Upside

VIX ETF Update: 

Volatility Index – New Methodology (VIX): Index: 12.66,  -1.48%,

iPath S&P 500 VIX Short-Term Futures ETN (NYSEARCA:VXX):  -1.71%, This ETN is designed to track volatility in the markets as measured by the Chicago Board Options Exchange Market Volatility Index (CBOE Index), a popular measure of the implied volatility of S&P 500 index options.  The CBOE Volatility Index is also known as the “fear” index or “fear” indicator in markets.  The iPath S&P 500 VIX Short-Term Futures ETN (NYSEARCA:VXX) prices itself off of the average and implied volatility of the first two months of futures contracts of the S&P 500 Index.

VelocityShares Daily 2X VIX Short-Term ETN (NYSEARCA:TVIX):  -3.28%,  This ETN is designed to track 2X return on volatility in the markets as measured by the S&P 500 VIX Short-Term Futures Index.  The S&P 500 VIX Short-Term Futures Index measures the volatility of the S&P 500 Index via futures contracts as traded on the CBOE.

iPath S&P 500 VIX Mid-Term Futures ETN (NYSEARCA:VXZ):  -1.34%, This ETN is designed to track volatility in the markets as measured by the CBOE Volatility Index futures contracts.  The CBOE Volatility Index is also known as the “fear” index or “fear” indicator in markets.  The iPath S&P 500 VIX Mid-Term Futures ETN (NYSEARCA:VXZ) is priced from the average volatility of the 4^th through 7^th month futures contracts of the S&P 500 Index as traded on the CBOE.

S&P 500 Dynamic VIX ETN (NYSEARCA:XVZ):  -0.82%, This ETN is designed to track volatility in the markets as measured by the S&P 500 Dynamic VIX Futures Total Return Index.  The S&P 500 Dynamic VIX Futures Total Return Index seeks to combine results of volatility of the S&P 500VIX Short-Term Futures Index Excess Return and the S&P 500 VIX Mid-Term Futures Index Excess Return to create an accurate market volatility reading, as measured by the CBOE.

Velocity Shares Daily Inverse VIX Short-Term ETN (NYSEARCA:XIV):  +1.60%, This ETN is designed to inversely track the volatility in the markets as measured by the S&P 500 VIX Short-Term Futures Index.  The S&P 500 VIX Short-Term Futures Index measures the volatility of the S&P 500 Index via futures contracts traded on the CBOE.

Bottom line:  VIX investors escaped with relatively minor losses on Monday as the VIX declined only 1.48 percent on a day when the S&P 500 hit new record intraday and closing highs.  With the MACD now below the zero line, there is an ominous indicator which is likely to put some fear into those who invest in the “fear index”.   

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On Monday, the Federal Reserve released its April 2013 Senior Loan Officer Opinion Survey on Bank Lending Practices.  It was a nice bit of economic news, because the survey report revealed that domestic banks have eased their lending standards somewhat, as demand increased for certain categories of loans.  Q2: 2013 US GDP Nowcast

From the report:

The survey results generally indicated that banks’ policies regarding lending to businesses eased over the past three months and demand increased, on balance. In particular, a relatively large fraction of domestic respondents reported having eased standards on C&I loans, and moderate to large net fractions of such respondents reportedly eased many terms on C&I loans to firms of all sizes.³ Banks that eased their C&I lending policies generally cited increased competition for such loans as an important reason for having done so. Demand for C&I loans also reportedly increased, but such reports were less widespread than in the previous survey. A moderate net fraction of banks reported having eased their CRE lending standards over the past three months and relatively large fractions continued to report an increase in demand for such loans. On net, U.S. branches and agencies of foreign banks reported that standards on CRE loans were about unchanged, but moderate fractions reported that demand strengthened on such loans.

On the household side, the survey results were more mixed. On balance, a few domestic banks reported having eased standards on prime residential mortgages over the past three months. For the fifth consecutive survey, respondents reported that demand for prime residential mortgage loans had strengthened on net. A small net fraction of respondents reported that they had eased standards on credit card and auto loans over the past three months, while standards on other consumer loans had remained about unchanged. On balance, banks reported having eased selected terms on auto loans, but terms on credit card and other consumer loans were reportedly little changed. Demand for credit card and auto loans had strengthened, on balance, while demand for other consumer loans was about unchanged.

Also on Monday, LPS (Lender Processing Services) released its Mortgage Monitor report for March.  The report indicated that its non-current loan count fell below 5 million for the first time since 2008.  The number of delinquent mortgages during March declined to 6.59 percent from 6.80 percent in February.  The percentage of mortgages which were actually in the foreclosure process dropped to 3.37 percent from 4.19 percent in March of 2012.

There were ​​4,997,000 loans which were either delinquent or in foreclosure during March. This represented a decrease from 5,589,000 in March 2012.  Markets Forecasted Favorable Employment Report

The major ETFs expected to respond to the Federal Reserve’s April 2013 Senior Loan Officer Opinion Survey on Bank Lending Practices and the LPS Mortgage Monitor report for March are:

iShares Dow Jones U.S. Real Estate ETF (NYSEARCA:IYR):  +0.40%

SPDR S&P Retail ETF (NYSEARCA:XRT):  -0.04%

Consumer Discretionary Select Sector SPDR ETF (NYSEARCA:XLY):  +0.32%

iShares Russell 2000 Index ETF (NYSEARCA:IWM):  +0.64%  Learn More About iShares ETFs

Vanguard Real Estate ETF (NYSEARCA:VNQ):  +0.52%

Bottom line:  The Federal Reserve’s Senior Loan Officer Opinion Survey for April revealed that although credit conditions remained relatively tight, a small percentage of banks had eased standards on credit cards and auto loans, while some banks have eased standards on prime residential mortgage loans, as demand has strengthened in that area.   

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The Nasdaq Composite index hit at 12-year record high of 3,396.21 during intraday trading, thanks to a 2.38 percent advance by Apple (NASDAQ:AAPL).  Barclay’s raised its price target on Apple from $465 to $525, as the company spent most of the day above $460.  Once again, the S&P 500 was not the only index setting a record high on Monday.

Monday’s big winner was Tesla Motors (NASDAQ:TSLA) which skyrocketed 9.07 percent as gamblers jumped on-board in advance of Wednesday’s earnings report.  On Monday, the company announced that it hired Chris Porritt as its vice president of vehicle engineering.  Porritt has been employed as chief engineer of vehicle engineering at Aston Martin.

Cliff’s Natural Resources (NYSEARCA:CLF) jumped 5.52 percent to $21.01 as the stock was upgraded by Mitesh Thakkar from “Market Perform” to “Outperform”.  Unfortunately, the jump did not do much for the materials sector which made a modest, 0.28 percent advance during Monday’s trading session.

The Dow Jones Industrial Average (NYSEARCA:DIA) slipped by only 5 points from Friday’s record-high close to finish Monday’s trading session at 14,968 for 0.03 percent dip.  The S&P 500 (NYSEARCA:SPY) advanced 0.19 percent to close at yet another record high of 1,617.50 after setting a new intraday record high of 1,619.77.

The Nasdaq 100 (NASDAQ:QQQ) climbed 0.37 percent to 2,955.  The Nasdaq Composite advanced 0.19 percent to close at 3,392.97 after hitting a 12-year record high of 3,396.21.  The Russell 2000 (NYSEARCA:IWM) climbed 0.56 percent to end the day at 959.

In other major markets, oil (NYSEARCA:USO) advanced 0.38 percent to close at $34.14.

On London’s ICE Futures Europe Exchange, June futures for Brent crude oil  advanced by $1.16 (1.12 percent) to $104.87/bbl. (NYSEARCA:BNO).

Read “How to Hedge Oil Prices in Volatile Markets”

June gold futures  advanced by $5.30 (0.36 percent) to $1,469.50 per ounce (NYSEARCA:GLD).

Transports remained in overdrive on Monday, with the Dow Jones Transportation Index (NYSEARCA:IYT) surging 1.36 percent.

European stocks declined on Monday after the final Markit Eurozone PMI for April came in at a contractionary 46.9 and Eurostat reported that Eurozone retail sales declined by 0.1 percent in March.  For the 27-nation European Union, March retail sales fell by 0.2 percent (NYSEARCA:VGK).

The Euro STOXX 50 Index finished Monday’s trading session with a 0.48 percent decline to 2,750 – remaining above its 50-day moving average of 2,656.  After breaking above its overhead resistance level of 2,700 on January 21, the STOXX 50 continues to test resistance at that level, which had been a barrier since the beginning of the year.

Read “European Stocks Stumble on Economic Data”

In Japan, the Tokyo Stock Exchange was closed on Monday, which was the last day of Golden Week.  Stock trading will resume on Tuesday (NYSEARCA:EWJ).

In China, stocks made a big advance despite disappointing PMI data from Markit Economics.  The HSBC China Services Business Activity Index dropped to 51.1 in April from 54.3 in March, for the weakest expansion of service sector activity since August 2011.  The April HSBC China Composite PMI (which covers both manufacturing and services) declined to 51.1 from 53.5 in March, indicating the weakest rate of expansion since last October.  The Shanghai Composite Index jumped 1.17 percent to 2,231 (NYSEARCA:FXI).  Hong Kong’s Hang Seng Index surged 0.99 percent to 22,915 (NYSEARCA:EWH).

Technical indicators reveal that the S&P 500 is climbing further above its 50-day moving average of 1,559 after hitting a new record-high close of 1,617.50 – motivating bears to hope that we are watching the formation of a head-and-shoulders pattern, which would signal a decline.  Its Relative Strength Index advanced from 64.15 to 64.91, holding below the threshold level of 70.  Most investors consider a RSI above 70 as an “overbought” signal.  The MACD continues to make a further break above the signal line, suggesting the likelihood of a further advance.

Read “Monday Market Movement – Time to Sell in May!”

For the day, most sectors finished solidly in positive territory except for the utilities, consumer staples and healthcare sectors.  The financial sector led the group, as the lone sector with an advance in excess of one percent.

Consumer Discretionary (NYSEARCA:XLY):  +0.32%

Technology:  (NYSEARCA:XLK):  +0.48%

Industrials (NYSEARCA:XLI):  +0.64%

Materials: (NYSEARCA:XLB):  +0.28%

Energy (NYSEARCA:XLE):  +0.68%

Financials: (NYSEARCA:XLF):  +1.06%

Utilities (NYSEARCA:XLU):  -1.39%

Health Care: (NYSEARCA:XLV):  -0.65%

Consumer Staples (NYSEARCA:XLP):  -0.73%

Bottom line:  Monday’s record-setting stock market bullishness was the result of good news about particular companies, rather than any economic data or government reports – demonstrating how the slightest sparks of upbeat information can send the bulls out for another record-breaking romp.    

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European stocks declined on Monday after the final Markit Eurozone PMI for April came in at a contractionary 46.9, although it represented a slight increase from the March four-month low of 46.5 (which was also the flash estimate for April).  The threshold dividing expansion from contraction is 50.  The following is a breakdown of composite PMI data from five countries listed in the report:

Ireland:  52.2  (2-month high)

Germany:  49.2  (5-month low)

Italy:  46.6  (19-month high)

France:  44.3  (4-month high)

Spain:  44.0  (4-month low)

A report from Eurostat indicated that Eurozone retail sales declined by 0.1 percent in March.  For the 27-nation European Union, March retail sales fell by 0.2 percent.    On a year-over-year basis, retail trade decreased by 0.2 percent in the Eurozone, but rose by 0.1 percent in the 27-nation European Union (NYSEARCA:VGK).  Unending Eurozone Recession

The Euro STOXX 50 Index finished Monday’s trading session with a 0.48 percent decline to 2,750 – remaining above its 50-day moving average of 2,656.  After breaking above its overhead resistance level of 2,700 on January 21, the STOXX 50 continues to test resistance at that level, which had been a barrier since the beginning of the year.  Its Relative Strength Index is 57.69 (NYSEARCA:FEZ).  The London Stock Exchange was closed on Monday for the Early May Bank Holiday (NYSEARCA:EWU).

The German DAX Index dipped 0.13 percent to 8,112 (NYSEARCA:EWG).  France’s CAC 40 Index declined 0.15 percent to 3,907(NYSEARCA:EWQ).  Spain’s IBEX 35 Index fell 0.48 percent to 8,503 (NYSEARCA:EWP).  Italy’s FTSE MIB Index dropped 0.35 percent to 16,862 (NYSEARCA:EWI).

As of 1:12 EDT, the euro declined 0.34 percent against the dollar, trading at $1.3069 (NYSEARCA:FXE).  Dollar Hits Session Highs vs. Euro, Yen Remains Lower

Spain’s ten-year bond yield dipped to 4.01 percent on Monday from Friday’s closing level of 4.02 percent (NYSEARCA:EWP).  Spain’s two-year bond yield declined to 1.50 percent on Monday from Friday’s closing level of 1.54 percent (NYSEARCA:EWP).

Italy’s ten-year bond yield declined to 3.77 percent on Monday from Friday’s closing level of 3.84 percent (NYSEARCA:EWI).

On London’s ICE Futures Europe Exchange, June futures for Brent crude oil  advanced by 80 cents (0.77 percent) to $104.51/bbl. (NYSEARCA:BNO, NYSEARCA:USO).

June gold futures  advanced by $5.60 (0.38 percent) to $1,469.80 per ounce (NYSEARCA:GLD).  Gold Gains as Market Views Precious Metal as Oversold

In China, stocks made a big advance despite disappointing PMI data from Markit Economics.  Small-cap companies led the way.  The HSBC China Services Business Activity Index dropped to 51.1 in April from 54.3 in March, for the weakest expansion of service sector activity since August 2011.  The April HSBC China Composite PMI (which covers both manufacturing and services) declined to 51.1 from 53.5 in March, indicating the weakest rate of expansion since last October.  The Shanghai Composite Index jumped 1.17 percent to 2,231 (NYSEARCA:FXI).  Hong Kong’s Hang Seng Index surged 0.99 percent to 22,915 (NYSEARCA:EWH).

In Japan, the Tokyo Stock Exchange was closed on Monday, which was the last day of Golden Week.  Stock trading will resume on Tuesday (NYSEARCA:EWJ).

American stock index futures were holding close to the breakeven level ahead of Monday’s opening bell in the absence of any significant economic reports.  The June 13 Dow Jones Industrials future advanced 0.01 percent to 14,899 as of 9:12 EDT.  The June 13 S&P 500 future rose 0.06 percent to 1,609 (NYSEARCA:SPY).  The June 13 Nasdaq 100 future climbed 0.28 percent to 2,943`.

Bottom line:  Europe continues to be faced with downbeat economic data as retail sales declined slightly in March and the Eurozone Composite PMI for April was stuck in the range of contraction at 46.9. 

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The Dow Jones Industrial Average (NYSEARCA:DIA) saw its first intra-day high above 15,000 on Friday but missed a close above this lofty level, settling at 14973.  However, the S&P 500 (NYSEARCA:SPY) reached an all time closing high milestone of 1614.

Last week was all about central banks and headline news as the European Central Bank cut interest rates and Wall Street celebrated a better than expected Non Farm Payrolls report on Friday.

For the week, the Dow Jones Industrial Average (NYSEARCA:DIA) climbed 1.8%, the S&P 500 (NYSEARCA:SPY) gained 2% and the Nasdaq Composite (NYSEARCA:QQQ) gained 3%.

The Dow Jones Industrial Average (NYSEARCA:DIA) made headlines as it crossed the 15,000 level for the first time but then closed below it at yet another new record of 14, 9 73.  The S&P 500 (NYSEARCA:SPY) managed to settle above the 1600 milestone for the first time.  The last time the S&P 500 (NYSEARCA:SPY) crossed 1500, the last century landmark, was in March, 2000, just before the “dot-com” crash that started soon after.

On My ETF Radar

Major stock indexes, including the S&P 500 (NYSEARCA:SPY) and Dow Jones Industrial Average (NYSEARCA:DIA) remain overbought and overextended in spite of the new highs being made, seemingly on a daily basis.

chart courtesy of StockCharts.com

In the chart above, you can see how the percent of stocks in the S&P 100 above their 200 day moving average is at extreme high levels from which moderate to major declines have previously started.  The top graph is of the weekly S&P 500 (NYSEARCA:SPY) and the lower graph highlights the rise and fall of the % of stocks above their 200 day moving average.

It’s easy to see how levels similar to the current level preceded significant declines in the S&P 500 (NYSEARCA:SPY) while a rising % is closely correlated to a rising S&P 500 (NYSEARCA:SPY) index.  Current extreme highs have been in place since just after the start of 2013, and as these high peaks tend to last for just a few months, the most likely next move for the S&P 500 (NYSEARCA:SPY) and Dow Jones Industrial Average (NYSEARCA:DIA) will be down and could most likely start before the end of June.

 ETF News You Can Really Use

Last week’s rally in the Dow Jones Industrial Average (NYSEARCA:DIA) and other major stock indexes was fueled by the European Central Bank cutting its interest rates, the Federal Reserve saying it was sticking to its quantitative easing program and might increase or decrease it going forward and the better than expected payroll report on Friday.

Earnings season is coming to a close and most would describe the results as modest, as best, as profits generally rose but top line sales and revenues, along with forward looking guidance, tended to disappoint.

The Friday jobs report came in at 165,000 which was better than expected and the previous two months were also revised upwards.  However, beneath the surface, items like hours worked, underemployment and overall labor force participation pointed to a still weak job market.

Hours worked declined to the lowest levels of the year and overall income declined.  The Labor Force Participation Rate is at a record low 63% and the employment to population ratio is at low levels not seen in the last 30 years.

Nevertheless, bad news continues to be OK and good news continues to be great as the current stock market rally continues.  Many analysts suggest that now there is a grand disconnect between financial markets and the real economy and bubbles are being formed.  Fundamentals eventually catch up to bubbles and “irrational exuberance” as we’ve seen so many times before.

So the new highs in the Dow Jones Industrial Average (NYSEARCA:DIA) come without any sort of any significant correction and in the face of significantly negative economic news.

Aside from the better than expected jobs report on Friday, European PMI remains in contractionary territory, March Factory Orders vastly missed expectations with a decline of 4%, ISM manufacturing fell perilously close to contraction territory with a print of 50.7, Chicago PMI slid to 49 and was a huge miss on expectations of 52.5.

Overseas, the news was similar with China PMI sliding closer to contraction territory with a print of 50.6, along with a decline in German PMI as Europe’s strongest economy grows weaker by the month.

But, in the end, markets rallied on the continued faith in central bank intervention and its ultimate success which even members of the Federal Reserve, itself, are beginning to doubt.

Richmond Federal Reserve President Jeffrey Lacker

Dallas Fed President Richard Fisher

Next week is light on economic news with job openings on Tuesday, weekly jobless claims on Thursday and federal budget on Friday.

Earnings season is winding down with major reports expected from Walt Disney and Priceline.com.

 Market Summary:

Economic Fundamentals: Mixed

• Slowing global growth
• Slowing U.S. growth
• On going Global central bank intervention

Technical Indicators: Mixed

• Uptrend
• Overbought
• Low volume
• Narrow breadth

Seasonality: Negative

• Sell in May and go away
• “Worst six months of the year”

Bottom line:  Mixed fundamental and technical factors combined with continued central bank intervention could make for a volatile week ahead.

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Things keep getting worse for the Eurozone economy.  Eurostat’s April 30 report on unemployment disclosed that the unemployment rate in the Eurozone rose to 12.1 percent in March from 12.0 percent in February.  In the greater 27-nation European Union, the unemployment rate remained at February’s level of 10.9 percent.

On May 2, Markit Economics reported that its final Eurozone Manufacturing PMI for April declined to 46.7 in April from 46.8 in March.

Eurostat also reported that its flash estimate of the Eurozone inflation rate declined to a three-year low of 1.2 percent in April from 1.7 percent in March.  Economists had expected a less-significant decline to 1.6 percent.  This persistent deflation demonstrates the lack of demand, which is a result of less consumer buying power.

On April 29, Markit Economics released its Eurozone Retail PMI for April.  The report indicated that Eurozone retail PMI remained in contraction at 44.2 in April.  Even in the Eurozone’s strongest economy – Germany – retail PMI fell to a 2-month low of 49.7.  Since 50 is the threshold between expansion and contraction, Germany’s retail PMI was in its second consecutive month of contraction after falling to 49.9 in March.

Germany itself may already have fallen into recession, as we discussed on April 15.  Germany’s report on its first quarter GDP is already overdue and if it is negative, the Eurozone’s largest economy will be officially in recession because its fourth quarter 2012 GDP contracted by 0.4 percent.  We received another hint about what to expect when Markit Economics released its Markit/BME Germany Manufacturing PMI for April, which contained this explanation:

At 48.1, down from 49.0 in March, the latest reading indicated a moderate worsening of overall business conditions, and the rate of deterioration was the most marked since December 2012.

If the Eurozone’s strongest economy is just falling into recession now, how long will the Eurozone recession continue?

On March 6, Eurostat reported that during the fourth quarter of 2012, the Eurozone GDP contracted by 0.6 percent and that GDP for the 27-nation European Union contracted by 0.5 percent.  In other words, the Eurozone’s recession took a turn for the worse:  After experiencing contraction by only 0.1 percent in the third quarter and 0.2 percent in the second quarter, fourth quarter GDP fell off the chart.

European investors appear to have become complacent as a result of ECB President Mario Draghi’s efforts to prop-up the Eurozone economy – known as the “Draghi Put”.  The latest example of the “Draghi Put” was the ECB governing council’s decision to lower the key interest rate from 0.75 to 0.50 percent.  The news came on May 2 – the same day as the release by Markit Economics of its downbeat Eurozone Manufacturing PMI report.  As a result, the major European stock indices were able to make modest advances on Thursday.  ECB Cuts Rates Sending Euro Up, Dollar Down, Futures Up

The chart below depicts the performance of the Vanguard MSCI Europe ETF (NYSEARCA:VGK) during the past 180 days (Chart courtesy of Stockcharts.com).

At Friday’s closing level of 51.92, VGK is far above its 50-day moving average of 49.64 as it continues to advance from a triple-bottom (see green bar on chart).  Its Relative Strength Index is at a 66.21.  Once the RSI reaches 70, it will be in a range which most investors consider an “overbought” signal.  The MACD is well above both the signal line and the zero line and it appears to be headed skyward.

Europe ETF Update: 

Vanguard MSCI Europe ETF (NYSEARCA:VGK):  +1.23%, This ETF is designed to track the performance of the MSCI Europe Index.  The MSCI Europe Index tracks the Europe stock market performance as reflected by the performance of top companies and sectors in developed Europe including France, Germany, Greece, The United Kingdom, Sweden, Norway, and Italy.

iShares MSCI Germany Index Fund ETF (NYSEARCA:EWG): +2.25%, This ETF is designed to track the performance of the MSCI Germany Index.  The MSCI Germany Index tracks German stock market performance as reflected by the performance of top companies and sectors in Germany including Siemens, Bayer, SAP, and Deutsche Bank.

iShares MSCI Italy Index ETF (NYSEARCA:EWI):  +1.15%,  This ETF is designed to track the performance of the MSCI Italy Index, which is capitalization-weighted and comprised of 29 stocks from the Italian Equity market.  The MSCI Italy Index generally concentrates on three sectors:  financial, energy and utilities.

iShares MSCI Spain Index ETF (NYSEARCA:EWP):  +1.42%,  EWP is the only ETF based on Spain.  EWP has been amazingly resilient despite the awful challenges Spain has faced during the past six months.  On June 1, EWP was trading at $21.23 per share.  After hitting $30 on October 17, it closed at $27.15 on November 16.  Learn More About iShares ETFs

Are Russia ETFs Signaling More Trouble?

Bottom line:  The major European stock indices continue to make big advances, despite downbeat economic data.  If Germany enters recession with a negative first quarter GDP report, we might see significant bearish sentiment among European investors.  

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Gold was making nice progress recovering from its mid-April swoon until Wednesday.  Demand for physical gold in China and India have been giving gold prices a boost during the past two weeks.  Nevertheless, on Wednesday the entire commodities sector experienced a selloff after the April Manufacturing ISM Report on Business from the Institute for Supply Management indicated that its manufacturing PMI for April declined to 50.7 percent from 51.3 percent in March.  Gold sank 1.20 percent on Wednesday, with trading volume in gold on the Comex about 30 percent thinner than its 30-day average.  Precious Metals Dumped in Favor of Defensive Telecom & Utilities 

The chart below depicts the trading activity in the SPDR Gold Trust ETF (NYSEARCA:GLD) during the past 180 days (Chart courtesy of Stockcharts.com).

At Friday’s close, GLD had made a slight advance to $142.09, representing a 0.83 percent increase from last Friday’s closing price of $140.91.  Although GLD is still $6.68 (or 4.49 percent) below its 50-day moving average, the MACD has risen well above the signal line, suggesting a further advance.  Its Relative Strength Index has risen to 45.87 from last week’s 42.55.  Demand for Gold Bullion Coins Jumps Nine-Fold at U.S. Mint

The following is a summary of how precious metal spot prices and ETFs performed from the close on Friday, April 26 until the close on Friday, May 3:

Gold ETF Update: 

Gold Spot Price:  $1,469.90/oz,   +0.52%

SPDR Gold Trust ETF (NYSEARCA:GLD):  +0.83%, This ETF reflects the current price and trends of Gold Bullion and so offers exposure to the gold market within a brokerage account.  The gold spot price for NYSEARCA:GLD is determined by the 24 hour global over-the-counter (OTC) gold market.  The SPDR Gold Trust ETF (NYSEARCA:GLD) is the world’s largest gold ETF and second largest ETF in existence.

iShares Gold Trust ETF (NYSEARCA:IAU):  +0.84%, This ETF reflects the current price and trends of Gold Bullion and so offers exposure to the gold market within a brokerage account.  The iShares Gold Trust ETF (NYSEARCA:IAU) is backed by gold held in trusts located in London, Toronto, and New York.  The gold spot price for the iShares Gold Trust ETF (NYSEARCA:IAU) is set by the London PM Fix Price for spot gold as determined by the London Bullion Market Association.

Silver ETF Update:

Silver Spot Price:  $24.09/ oz,   -0.04%

iShares Silver Trust ETF (NYSEARCA:SLV):  +0.38%, This ETF reflects the current price of silver and trends of Silver Bullion and so offers exposure to the silver market within a brokerage account.  The iShares Silver Trust ETF (NYSEARCA:SLV) is backed by real silver and the silver price is set by the London PM Fix Price for silver as determined by the London Bullion Market Association.

ProShares Ultra Silver ETF (NYSEARCA:AGQ):  +1.38%, This ETF reflects the 2X daily return of the current price of Silver Bullion.  The ETF is priced in US dollars based on the afternoon closing price of Silver in London.  The ProShares Ultra Silver ETF thus offers double exposure to the silver market within a brokerage account.

Platinum ETF Update: 

Platinum Spot Price: $1,499.80 /oz,   +1.86%

ETFS Physical Platinum Shares ETF (NYSEARCA:PPLT):  +1.50% This ETF reflects the current spot price of physical platinum and so offers exposure to the platinum market within a brokerage account.  The price of platinum is specified by the London Platinum and Palladium Market (LPPM) rules and is backed by Platinum held in vaults in London, UK and Zurich, Switzerland.

Bottom Line:  Gold is slowly clawing its way back from its mid-April swoon.  As of Friday’s close, the spot price of gold remained 5.77 percent below its price on April 11.      

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As we have been discussing for the past two weeks, the increasing strength of the euro had motivated a number of commentators – including Kit Juckes at Société Générale – to express concern that the currency may be too strong to allow for an export-led economic recovery in the Eurozone.  It was assumed that the May 2 meeting of the European Central Bank’s governing council would bring another interest rate reduction.  Although a lower interest rate was not expected to increase lending by the Eurozone’s troubled banks, there was widespread belief that the rate cut would result in a lower exchange rate for the euro which would benefit the region’s exporters.

After the ECB statement was released, announcing that the bank would cut its key interest rate from 0.75 percent to 0.50 percent, the euro actually strengthened to just above $1.32.  At his press conference at the conclusion of the ECB governing council’s meeting to announce the rate cut, ECB president Mario Draghi added that he was open to the idea of lowering the deposit interest rate to a negative number.  This sent the euro sinking.  Later in the day, Draghi explained that he was just speaking hypothetically about negative a interest rate.  On Friday, the euro regained enough strength to finish the week with an advance of just more than one-half of a percentage point.  Gold Goes Up After Draghi Says Negative Interest Rates Are Possible

The chart below depicts the trading activity in the CurrencyShares Euro Trust ETF (NYSEARCA:FXE) during the past 180 days (Chart courtesy of Stockcharts.com).

As we pointed out on April 21, the advance of Tuesday, April 16 – which resulted in a close at $130.65 – appeared to be forming the “head” of another head-and-shoulders pattern, which could actually become the right shoulder on an even larger pattern.  This is continuing to be the case.  Friday’s close at $129.99 was 97 cents above its 50-day moving average of $129.99.  More important, its 50-day moving average is now just 61 cents above the 200-day moving average, with both headed toward each other, increasing the risk of an imminent “death cross”, which would almost guarantee a further decline.

The Relative Strength Index for FXE advanced to 54.24 from last Friday’s close at 50.48. Although the MACD has risen further, the signal line is poised to cross above it.  This would indicate that FXE could be making a further decline.  Add to that the risk that the right shoulder on the chart-sized head-and-shoulders pattern would also be complete by then and we might see a decline below $127.  Euro Cuts Rates Sending Euro Up, Dollar Down, Futures Up

Currency ETF Update: 

The following is a summary of how currency indices and ETFs performed from the close on Friday, April 26 until the close on Friday, May 3:

$US Dollar Index:  $82.14   -0.53%

PowerShares DB US Dollar Index Bullish Fund ETF (NYSEARCA:UUP):  -0.40%, This ETF reflects US dollar performance as indicated by the Deutsche Bank Long US Dollar Index (USDX) Futures Index (DB Long USD Futures Index).  The USDX Index invests solely in Long USDX Futures Contracts, and compares the performance of the US dollar against the Japanese Yen, the Euro, the Swiss Franc, the British Pound, the Canadian Dollar, and the Swedish Krona.

Euro Dollar Index-Philadelphia: EUR:  $131.16   +0.64%

CurrencyShares Euro Trust ETF (NYSEARCA:FXE):   +0.62%, This ETF is designed to track the performance of the Euro dollar.  CurrencyShares Euro Trust ETF (NYSEARCA:FXE) is a trust denominated in Euro dollars, and the depository bank is JP Morgan Chase Bank, N.A. London Branch.

ProShares UltraShort Euro ETF (NYSEARCA:EUO):  -1.34%,  This ETF tracks the 2X inverse daily performance of the Euro dollar in US dollar prices.  The ProShares UltraShort Euro ETF (NYSEARCA:EUO) relies on the EUR/USD cross rate as determined by Reuters by 4 PM EST to determine the price of the Euro in US dollars.

Australian Dollar Index-Philadelphia: AUD:  $103.18   +0.33%

CurrencyShares Australian Dollar Trust ETF (NYSEARCA:FXA):  +0.27%, This ETF is designed to track the performance of the Australian dollar.  The CurrencyShares Australian Dollar Trust ETF (NYSEARCA:FXA) is a trust denominated in Australian dollars, and the depository bank is JP Morgan Chase Bank, N.A. London Branch.

CurrencyShares Swiss Franc Trust ETF (NYSEARCA:FXF):  +0.72% This ETF is designed to track the performance of the Swiss Franc.  The Swiss franc is the national currency of Switzerland and Liechtenstein and the currency of the accounts of the Swiss National Bank, the central bank of Switzerland. The Swiss franc is the sixth-most-traded currency in the world, accounting for 6.4% of global foreign exchange transactions. The USD/Swiss franc pair is the fifth-most-traded currency pair.

Japanese Yen Index–Philadelphia: JPY:  $100.98     -0.98%

CurrencyShares Japanese Yen Trust ETF (NYSEARCA:FXY):  -0.92%   This ETF is designed to track the performance of the Japanese Yen.  The CurrencyShares Japanese Yen Trust ETF (NYSEARCA:FXY) is a trust denominated in Japanese Yen, and the depository bank is JP Morgan Chase Bank, N.A. London Branch.

Bottom Line:  Despite the euro’s advance during the past week, the technical indicators suggest a significant risk that the currency could be headed for a more significant decline.

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Newton’s First Law Of Motion suggests that an object in motion tends to stay in motion unless acted upon by an outside force and in the world of ETFs, this is known as “the trend is your friend,” since investment classes in motion tend to stay in motion until something acts upon them to change the trend.

April turned out to be a very lucrative month for many investors.  The S&P 500 (NYSEARCA:SPY) advanced 1.8 percent during the month Many stocks, sectors and ETFs made big gains.  On the other hand, while the bulls were on the rampage, many ETFs and sectors were left in the dust.  Worse yet, many sectors and ETFs actually declined during April.  This would be easy to understand if we were talking about inverse ETFs.  Unfortunately, some sectors had no excuse for falling in April.  They were simply the wrong place to be last month.  Unfortunately, many investors remained on those positions for too long, believing that those investments would follow the rest of the market.  Unfortunately, that never happened.

Hot ETFs and Sectors For April

Contrary to what many investors expected, low-risk, defensive sectors did best and the higher-risk areas underperformed.  As the chart below indicates, the best-performing area was the utilities sector (chart courtesy of Stockcharts.com).

As the chart indicates, the utilities sector advanced 7.10 percent between March 20 and May 1.  Investors who purchased shares in the Utilities Select Sector SPDR ETF (NYSEARCA:XLU) on March 31, realized a gain of 5.95 percent by the closing bell on April 30.

Investors in the Consumer Staples Select Sector SPDR ETF (NYSEARCA:XLP) realized a gain of 3.04 percent during April.  In case you haven’t noticed by now, the last eleven days of March added a bit more impact for the chart than we would have seen if it had been limited to the thirty days of April.

Many investors in the solar sector who were fortunate enough to have owned some shares in the Guggenheim Solar ETF (TAN) during April saw the share price jump 28.9 percent during that month.  Rumors that Warren Buffet was interested in buying Suntech Power (STP) helped fuel the surge.

International ETFs had a good run during April.  Those who were willing to chase beta and bet on Italy had a good month.  Investors in the iShares MSCI Italy Index ETF (NYSEARCA:EWI) saw the share price climb 11.9 percent during April.  Although Germany may have seemed like a “no brainer”, the iShares MSCI Germany Index ETF (NYSEARCA:EWG) advanced by a more modest 4.42 percent during April.  On the other hand, those who had faith in “Abenomics” – Prime Minister Shinzo Abe’s program for rescuing Japan’s economy – saw their shares in the iShares MSCI Japan Index ETF (NYSEARCA:EWJ) jump 11.3 percent.

Cold ETFs and Sectors For April

Those who were persuaded by all of those advertisements about investing in gold had a very unpleasant April.  Investors in the Market Vectors Junior Gold Miners ETF (NYSEARCA:GDXJ) watched their position become 15 percent less valuable than an investment in rolls of shiny quarters, available at any bank.  The “big league” gold miners didn’t fare much better.  The Market Vectors Gold Miners ETF (NYSEARCA:GDX) retreated by 13 percent during April.  Despite the hype silver had been receiving, “old school” pro photographers who still use film would have enjoyed a great month if film manufacturers passed their savings along to the customer in the same manner as occasionally practiced by the petroleum industry.  Silver prices sank.  The iShares Silver Trust ETF (NYSEARCA:SLV) fell 11.5 percent during April.

Bottom line: April produced winners and losers, as every month does, and a careful look at these winners and losers can point the way to potential gains as April showers turn into May flowers. Although investors understood that the market was in a “risk on” mode through most of April, risk did not necessarily pay.  Those who stuck with low-risk defensive sectors and ETFs did well, while those who placed their faith in tech, the materials sector and industrials spent too much of the month looking at red numbers.

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The VIX Index and VIX ETFs continued to decline this past week, with the VIX Index losing 5.58% to close at 12.85, the iPath S&P 500 VIX Short Term Futures ETN (NYSEARCA:VXX) losing -2.87%, and the VelocityShares Inverse VIX ETN (NYSEARCA:XIV) adding +2.80%.

New Dow Jones Industrial Average and S&P 500 records last week likely contributed to the VIX’ decline, as it was obvious that all fear had left the marketplace by Friday afternoon.  VIX ETFs respond to fear among investors, and record highs in equity markets certainly does not translate to fearful behavior.  Furthermore, last week’s positive employment reports likely contributed to the continuing VIX ETF decline, as more jobs in the US economy typically equates to less fearful markets too.

From a technical perspective, the VIX Index continues to hover at its ’50′ level RSI, and currently holds a near flat (but positive) MACD of .126.  So, the VIX Index could start an upward trajectory soon, of course assuming that major equity markets begin to decline.  Furthermore, the fact that the VIX Index has a positive MACD alongside record high indexes could suggest a possible divergence in trend, as typically a negative VIX MACD would accommodate positive indexes.  Such a divergence could suggest a major trend change soon, in favor of the VIX Index and VIX ETFs.

Where the VIX goes for now is anyone’s guess, but equity markets could be nearing the end of their record breaking tenure.  At the end of the day however, the VIX Index and VIX ETFs have a long way to go to turn bullish, as the VIX Index 5.58% decline this past week put it far heavy resistnace at its 50 and 200 day moving averages.

VIX ETF Update:

Volatility Index – New Methodology (VIX): Index: 12.85, -5.58%

iPath S&P 500 VIX Short-Term Futures ETN (NYSEARCA:VXX): -2.87%, This ETN is designed to track volatility in the markets as measured by the Chicago Board Options Exchange Market Volatility Index (CBOE Index), a popular measure of the implied volatility of S&P 500 index options.  The CBOE Volatility Index is also known as the “fear” index or “fear” indicator in markets.  The iPath S&P 500 VIX Short-Term Futures ETN (NYSEARCA:VXX) prices itself off of the average and implied volatility of the first two months of futures contracts of the S&P 500 Index.

VelocityShares Daily 2X VIX Short-Term ETN (NYSEARCA:TVIX): -4.53%, This ETN is designed to track 2X return on volatility in the markets as measured by the S&P 500 VIX Short-Term Futures Index.  The S&P 500 VIX Short-Term Futures Index measures the volatility of the S&P 500 Index via futures contracts as traded on the CBOE.  The CBOE Volatility Index is also known as the “fear” index or “fear” indicator in markets.

iPath S&P 500 VIX Mid-Term Futures ETN (NYSEARCA:VXZ): -.35%, This ETN is designed to track volatility in the markets as measured by the CBOE Volatility Index futures contracts.  The CBOE Volatility Index is also known as the “fear” index or “fear” indicator in markets.  The iPath S&P 500 VIX Mid-Term Futures ETN (NYSEARCA:VXZ) is priced from the average volatility of the 4^th through 7^th month futures contracts of the S&P 500 Index as traded on the CBOE.

S&P 500 Dynamic VIX ETN (NYSEARCA:XVZ): +.08%, This ETN is designed to track volatility in the markets as measured by the S&P 500 Dynamic VIX Futures Total Return Index.  The S&P 500 Dynamic VIX Futures Total Return Index seeks to combine results of volatility of the S&P 500VIX Short-Term Futures Index Excess Return and the S&P 500 VIX Mid-Term Futures Index Excess Return to create an accurate market volatility reading, as measured by the CBOE.  The CBOE Volatility Index is also known as the “fear” index or “fear” indicator in markets.

Velocity Shares Daily Inverse VIX Short-Term ETN (NYSEARCA:XIV): +2.80%, This ETN is designed to inversely track the volatility in the markets as measured by the S&P 500 VIX Short-Term Futures Index.  The S&P 500 VIX Short-Term Futures Index measures the volatility of the S&P 500 Index via futures contracts traded on the CBOE.  The CBOE Volatility Index is also known as the “fear” index or “fear” indicator in markets.

Bottom Line:  VIX ETFs continue to decline, likely in reaction to continued equity market records.  If equity markets continue to rise, VIX ETFs will likely continue to decline.

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The VIX finished Friday’s trading session at 12.85, closing below its 50-day moving average for the third consecutive day.  It is now significantly below its 50-day MA of 13.78.  Its Relative Strength Index declined from Thursday’s 48.59 to 45.66.  More important the MACD has now resumed its downward trajectory below the signal line, which usually signals a further decline.

Stock market volatility was reduced significantly when the Department of Labor’s Bureau of Labor Statistics released its April non-farm payrolls report.  Although economists were expecting the unemployment rate to remain at 7.6 percent with 153,000 new non-farm payroll jobs added in April, the BLS report disclosed that 165,000 new jobs were added in April and that the unemployment rate declined to 7.5 percent, without any reduction in the labor force participation rate.  Beyond that, February’s total was revised from 268,000 to 332,000 and the March figure was revised from the disappointing 88,000 to 138,000.  The revisions for February and March meant that 114,000 were added during those months, which had not been previously reported.

The good news from the BLS eclipsed the Institute for Supply Management’s April 2013 Non-Manufacturing ISM Report on Business.   What many people call the “services PMI” is now called the Non-Manufacturing Index or “NMI” by the ISM.  Although economists were expecting the April NMI to decline to 54.0 from 54.4 in March, the NMI actually declined to 53.1.  Because any result above 50 indicates expansion, the April NMI simply indicated that the non-manufacturing sector grew at a slightly slower rate than expected.  Markets Jump After the Jobs Report

A review of the S&P 500 chart reveals that although the S&P 500 remains above its 50-day moving average of 1,557 with another record-high close at 1,614.42, there exists the possibility that that we are watching the formation of a head-and-shoulders pattern, which would signal a decline.  VIX investors will be watching the S&P 500 chart closely next week to see whether such a pattern takes shape.  Are Low-Volatility ETFs Capable of Big Gains?

VIX ETF Update: 

Volatility Index – New Methodology (VIX): Index: 12.85,  -5.45%,

iPath S&P 500 VIX Short-Term Futures ETN (NYSEARCA:VXX):  -2.15%

VelocityShares Daily 2X VIX Short-Term ETN (NYSEARCA:TVIX):  -3.86%

 iPath S&P 500 VIX Mid-Term Futures ETN (NYSEARCA:VXZ):  -0.59%

S&P 500 Dynamic VIX ETN (NYSEARCA:XVZ):  +0.15%

Velocity Shares Daily Inverse VIX Short-Term ETN (NYSEARCA:XIV):  +2.25%

Bottom line:  The April non-farm payrolls report and the ensuing stock market rally sent the VIX falling well below its 50-day moving average.  The enthusiasm resulting from the non-farm payrolls report eclipsed the disappointing Non-Manufacturing ISM Report on Business from the Institute for Supply Management.   

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On Friday, the stock market experienced new record highs for both the Dow and the S&P 500 after the Department of Labor’s Bureau of Labor Statistics released its April non-farm payrolls report.  Although economists were expecting the unemployment rate to remain at 7.6 percent with 153,000 new non-farm payroll jobs added in April, the BLS report disclosed that 165,000 new jobs were added in April and that the unemployment rate declined to 7.5 percent, without any reduction in the labor force participation rate.  Beyond that, February’s total was revised from 268,000 to 332,000 and the March figure was revised from the disappointing 88,000 to 138,000.  The revisions for February and March meant that 114,000 were added during those months, which had not been previously reported.  165K New Jobs Added, and Unemployment Rate Falls to 7.5%

It was also noteworthy that the report indicated more hiring by restaurants and bars.  This implies that consumers have more disposable income that they are willing to spend on such luxuries.  April Payrolls Rebound

From the report:

Total nonfarm payroll employment rose by 165,000 in April, and the unemployment rate was little changed at 7.5 percent, the U.S. Bureau of Labor Statistics reported today. Employment increased in professional and business services, food services and drinking places, retail trade, and health care.

Household Survey Data

The unemployment rate, at 7.5 percent, changed little in April but has declined by 0.4 percentage point since January. The number of unemployed persons, at 11.7 million, was also little changed over the month; however, unemployment has decreased by 673,000 since January.

*   *   *

Establishment Survey Data

Total nonfarm payroll employment increased by 165,000 in April, with job gains in professional and business services, food services and drinking places, retail trade, and health care. Over the prior 12 months, employment growth averaged 169,000 per month.

The good news from the BLS eclipsed the Institute for Supply Management’s April 2013 Non-Manufacturing ISM Report on Business.   What many people call the “services PMI” is now called the Non-Manufacturing Index or “NMI” by the ISM.  Although economists were expecting the April NMI to decline to 54.0 from 54.4 in March, the NMI actually declined to 53.1.  Because any result above 50 indicates expansion, the April NMI simply indicated that the non-manufacturing sector grew at a slightly slower rate than expected.

The major ETFs expected to respond to the Department of Labor’s non-farm payrolls report are:

Consumer Staples Select Sector SPDR ETF (NYSEARCA:XLP):  +0.44%

SPDR S&P Retail ETF (NYSEARCA:XRT):  +1.59%

Consumer Discretionary Select Sector SPDR ETF (NYSEARCA:XLY):  +1.26%

iShares Russell 2000 Index ETF (NYSEARCA:IWM):  +1.59%

Vanguard Real Estate ETF (NYSEARCA:VNQ):  +0.40%

Bottom line:  The April non-farm payrolls report demonstrated that progress is being made on the employment front, especially with the revision indicating that 332,000 jobs were added during February.  As the unemployment rate continues to decline, the Federal Reserve will soon be faced with the challenge to rethink its strategy on quantitative easing. 

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The Department of Labor’s Bureau of Labor Statistics shocked everyone with its April non-farm payrolls report.  Although economists were expecting the unemployment rate to remain at 7.6 percent with 153,000 new non-farm payroll jobs added in April, the BLS report disclosed that 165,000 new jobs were added in April and that the unemployment rate declined to 7.5 percent, without any reduction in the labor force participation rate.  Beyond that, February’s total was revised from 268,000 to 332,000 and the March figure was revised from the disappointing 88,000 to 138,000.  Even before the opening bell, everyone knew that the S&P 500 would reach a new record high on Friday.

The revisions for February and March meant that 114,000 were added during those months, which had not been previously reported.  The good news sent the bulls on a rampage for a seriously “risk on” day.

The Dow Jones Industrial Average (NYSEARCA:DIA) jumped 142 points to hit 14,973 for an advance of 0.96 percent after breaking above 15,000 for the first time for a record high of 15,002.85.  The S&P 500 (NYSEARCA:SPY) surged 1.05 percent to close at a record high of 1,614.42 after setting a new intraday record high of 1,618.46.

The Nasdaq 100 (NASDAQ:QQQ) surged 1.15 percent to 2,944.  The Russell 2000 (NYSEARCA:IWM) soared 1.66 percent to end the day at 955.

In other major markets, oil (NYSEARCA:USO) jumped 1.55 percent to close at $34.01.

On London’s ICE Futures Europe Exchange, June futures for Brent crude oil  advanced by $1.15 (1.12 percent) to $104.00/bbl. (NYSEARCA:BNO).

June gold futures advanced by 10 cents (0.01 percent) to $1,467.70 per ounce (NYSEARCA:GLD).

Read “Why Cash Is No Longer King”

Transports went into warp drive on Friday, with the Dow Jones Transportation Index (NYSEARCA:IYT) jumping 2.14 percent.

Although developments in the United States are frequently credited for European stock market rallies, on Friday the major European stock markets really did rally in response to American economic data.  A review of the charts will reveal that at 8:30 EDT, when the Bureau of Labor Statistics released the surprisingly better-than-expected non-farm payrolls report for April, the major European stock indices spiked (NYSEARCA:VGK).

The Euro STOXX 50 Index finished Friday’s trading session with a 1.65 percent jump to 2,763 – remaining well above its 50-day moving average of 2,654.  After breaking above its overhead resistance level of 2,700 on January 21, the STOXX 50 continues to test resistance at that level, which had been a barrier since the beginning of the year.

Read “European Stocks Advance after American Jobs Report”

In Japan, the Tokyo Stock Exchange was closed on Friday for a national holiday (NYSEARCA:EWJ).

In China, the bulls went for a run on the Shanghai Stock Exchange in a rebound rally following two days of disappointing PMI data.  The Shanghai Composite Index jumped 1.45 percent to 2,205 (NYSEARCA:FXI).  Hong Kong’s Hang Seng Index advanced only 0.10 percent to 22,689 after the HSBC Hong Kong PMI declined to 49.9 in April from 50.5 in March (NYSEARCA:EWH).

Technical indicators reveal that the S&P 500 is climbing further above its 50-day moving average of 1,557 after hitting a new record-high close of 1,614.42 – motivating bears to hope that we are watching the formation of a head-and-shoulders pattern, which would signal a decline.  Its Relative Strength Index advanced from 59.72 to 64.15.  The MACD is finally making a further break above the signal line after crossing it last Thursday, suggesting the likelihood of a further advance.

Read “First Friday of May – Go Away or Stay and Play?”

For the day, all sectors finished solidly in positive territory except for the utilities sector, which declined by only 20 basis points.  The industrials, materials and industrial sectors led the group, all of which made advances in excess of 1.80 percent.

Consumer Discretionary (NYSEARCA:XLY):  +1.26%

Technology:  (NYSEARCA:XLK):  +1.04%

Industrials (NYSEARCA:XLI):  +1.84%

Materials: (NYSEARCA:XLB):  +1.82%

Energy (NYSEARCA:XLE):  +1.81%

Financials: (NYSEARCA:XLF):  +1.07%

Utilities (NYSEARCA:XLU):  -0.20%

Health Care: (NYSEARCA:XLV):  +0.68%

Consumer Staples (NYSEARCA:XLP):  +0.44%

Bottom line:  The better-than-expected April non-farm payrolls report, which noted the addition of 114,000 jobs by way of upward revisions for February and March sent both the Dow Jones Industrial Average and the S&P 500 to new record intraday and closing high levels. 

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For once, European stocks really did rally in response to American economic data.  A review of the charts will reveal that at 8:30 EDT, when the Bureau of Labor Statistics released the surprisingly better-than-expected non-farm payrolls report for April, the major European stock indices spiked (NYSEARCA:VGK).  Good news from Britain helped fuel European bullishness as the Markit/CIPS UK Services PMI rose to 52.9 in April from 52.4 in March (NYSEARCA:EWU).  Markets Jump after Jobs Report

The Euro STOXX 50 Index finished Friday’s trading session with a 1.65 percent jump to 2,763 – remaining above its 50-day moving average of 2,654.  After breaking above its overhead resistance level of 2,700 on January 21, the STOXX 50 continues to test resistance at that level, which had been a barrier since the beginning of the year.  Its Relative Strength Index is 60.36 (NYSEARCA:FEZ).  The FTSE 100 Index surged 0.94 percent to 6,521 (NYSEARCA:EWU).

The German DAX Index skyrocketed 2.02 percent to 8,122 (NYSEARCA:EWG).  France’s CAC 40 Index jumped 1.40 percent to 3,912 (NYSEARCA:EWQ).  Spain’s IBEX 35 Index  soared 1.65 percent to 8,544 (NYSEARCA:EWP).  Italy’s FTSE MIB Index  advanced 1.04 percent to 16,922 (NYSEARCA:EWI).

As of 2:01 EDT, the euro advanced 0.30 percent against the dollar, trading at $1.3104 (NYSEARCA:FXE).

Spain’s ten-year bond yield dropped to 4.01 percent on Friday from Thursday’s closing level of 4.09 percent (NYSEARCA:EWP).  Spain’s two-year bond yield declined to 1.54 percent on Friday from Thursday’s closing level of 1.58 percent (NYSEARCA:EWP).

Italy’s ten-year bond yield advanced to 3.84 percent on Friday from Thursday’s closing level of 3.80 percent (NYSEARCA:EWI).

On London’s ICE Futures Europe Exchange, June futures for Brent crude oil  advanced by $1.47 (1.43 percent) to $104.32/bbl. (NYSEARCA:BNO, NYSEARCA:USO).

June gold futures declined by $2.10 (0.14 percent) to $1,465.50 per ounce (NYSEARCA:GLD).

In China, the bulls went for a run on the Shanghai Stock Exchange in a rebound rally following two days of disappointing PMI data.  The Shanghai Composite Index jumped 1.45 percent to 2,205 (NYSEARCA:FXI).  Hong Kong’s Hang Seng Index advanced only 0.10 percent to 22,689 after the HSBC Hong Kong PMI declined to 49.9 in April from 50.5 in March (NYSEARCA:EWH).  Is this China ETF About to Surge?

In Japan, the Tokyo Stock Exchange was closed on Friday for a national holiday (NYSEARCA:EWJ).

American stock index futures were in positive territory following a surprisingly better-than-expected non-farm payrolls report for April.  The June 13 Dow Jones Industrials future advanced 0.83 percent to 14,883 as of 9:14 EDT.  The June 13 S&P 500 future rose 0.85 percent to 1,605 (NYSEARCA:SPY).  The June 13 Nasdaq 100 future climbed 0.90 percent to 2,928.

Bottom line:  America’s surprisingly upbeat April non-farm payrolls report inspired a rally in the European stock markets as the likelihood for an improving market for the region’s exporters raised hopes for an escape from the ongoing Eurozone recession. 

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After closing below its 50-day moving average for the first time since April 19 on Wednesday, the VIX finished Thursday’s trading session at 13.59, just below its 50-day moving average of 13.83.  Its Relative Strength Index declined from Wednesday’s 52.37 to 48.59.  More important, Wednesday’s advance never raised its MACD above the signal line and it has now resumed its downward trajectory, which usually signals a further decline.

A strong factor in reducing stock market volatility was the Department of Labor’s report that initial unemployment claims for the week ending April 27 dropped to 324,000.  It was the lowest weekly level for initial claims since 2008.  Economists had been expecting initial claims to increase to 345 thousand.  Last week’s initial figure of 339,000 was revised upward to 342,000.  The 4-week moving average fell to the lowest it has been in a year.  The news obviously raised investors’ hopes that Friday’s report on non-farm payrolls from the Bureau of Labor Statistics will be more positive than the ADP National Employment Report.

If the good news from the Department of Labor were not enough, the Commerce Department’s Census Bureau released its Trade Balance Report for March.  Although economists were expecting to see that the trade deficit decreased to $42.4 billion in March from $43.0 in February, the report indicated a more significant decline to $38.8 billion.  Markets Spike to All-Time Highs … Again

VIX ETF Update: 

Volatility Index – New Methodology (VIX): Index:  13.59,  -6.21%,

iPath S&P 500 VIX Short-Term Futures ETN (NYSEARCA:VXX):  -3.29%, This ETN is designed to track volatility in the markets as measured by the Chicago Board Options Exchange Market Volatility Index (CBOE Index), a popular measure of the implied volatility of S&P 500 index options.

VelocityShares Daily 2X VIX Short-Term ETN (NYSEARCA:TVIX):  -4.68%, This ETN is designed to track 2X return on volatility in the markets as measured by the S&P 500 VIX Short-Term Futures Index.

iPath S&P 500 VIX Mid-Term Futures ETN (NYSEARCA:VXZ):  -1.07%, This ETN is designed to track volatility in the markets as measured by the CBOE Volatility Index futures contracts.

S&P 500 Dynamic VIX ETN (NYSEARCA:XVZ):  -0.38%, This ETN is designed to track volatility in the markets as measured by the S&P 500 Dynamic VIX Futures Total Return Index.

Velocity Shares Daily Inverse VIX Short-Term ETN (NYSEARCA:XIV):  +3.64%, This ETN is designed to inversely track the volatility in the markets as measured by the S&P 500 VIX Short-Term Futures Index.

Bottom line: The VIX fell back below its 50-day moving average on Thursday after an unexpected drop in weekly initial unemployment claims combined with a better-than-expected narrowing of the trade deficit to send the S&P 500 to a new record high and reduce stock market volatility.  Spectacular Day on Wall Street  

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Stocks were back in positive territory on Thursday after the Department of Labor reported that initial unemployment claims for the week ending April 27 dropped to 324,000.  It was the lowest weekly level for initial claims since 2008.  Economists had been expecting initial claims to increase to 345 thousand.  Last week’s initial figure of 339,000 was revised upward to 342,000.  The 4-week moving average fell to the lowest it has been in a year.  Lowest Unemployment Claims Since January 2008

From the report:

In the week ending April 27, the advance figure for seasonally adjusted initial claims was 324,000, a decrease of 18,000 from the previous week’s revised figure of 342,000. The 4-week moving average was 342,250, a decrease of 16,000 from the previous week’s revised average of 358,250.

Economists are currently expecting Friday’s release of the April non-farm payrolls report from the Bureau of Labor Statistics to reveal that the unemployment rate held at 7.6 percent and that 153,000 new non-farm payroll jobs were added during April.  Although the ADP National Employment Report turned out to be a disappointment, the ADP report has not been a useful guide as to what to expect from the BLS.  April Employment Report Preview

Also on Thursday, the Commerce Department’s Census Bureau released its Trade Balance Report for March.  Although economists were expecting to see that the trade deficit decreased to $42.4 billion in March from $43.0 in February, the report indicated a more significant decline to $38.8 billion.

From the report:

The U.S. Census Bureau and the U.S. Bureau of Economic Analysis, through the Department of Commerce, announced today that total March exports of $184.3 billion and imports of $223.1 billion resulted in a goods and services deficit of $38.8 billion, down from $43.6 billion in February, revised. March exports were $1.7 billion less than February exports of $186.0 billion. March imports were $6.5 billion less than February imports of $229.6 billion.

In March, the goods deficit decreased $4.6 billion from February to $56.1 billion, and the services surplus increased $0.2 billion from February to $17.3 billion. Exports of goods decreased $1.8 billion to $130.3 billion, and imports of goods decreased $6.4 billion to $186.5 billion. Exports of services increased $0.1 billion to $53.9 billion, and imports of services decreased $0.1 billion to $36.6 billion.

The major ETFs expected to respond to the Department of Labor’s report on initial unemployment claims and the Census Bureau’s Trade Balance Report for March are:

Consumer Staples Select Sector SPDR ETF (NYSEARCA:XLP):  +0.37%

SPDR S&P Retail ETF (NYSEARCA:XRT):  +1.17%

Consumer Discretionary Select Sector SPDR ETF (NYSEARCA:XLY):  +0.98%

iShares Russell 2000 Index ETF (NYSEARCA:IWM):  +1.56%

Industrial Select Sector SPDR ETF (NYSEARCA:XLI):  +1.12%

Bottom line:  The big drop in weekly initial unemployment claims obviously raised investors’ hopes that Friday’s report on non-farm payrolls from the Bureau of Labor Statistics will be more positive than the ADP National Employment Report. 

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The Department of Labor’s weekly report on initial unemployment claims for the week ending April 27 dropped to 324,000.  It was the lowest weekly level for initial claims since 2008.  The report sent the S&P 500 to a new record intraday high and a new record high close at 1,597.59, edging out Tuesday’s record-high close at 1,597.57.

The Dow Jones Industrial Average (NYSEARCA:DIA) jumped 130 points to hit 14,831 for an advance of 0.89 percent.  The S&P 500 (NYSEARCA:SPY) surged 0.94 percent to close at a record high of 1,597.59 after setting a new intraday record high of 1,598.60.

The Nasdaq 100 (NASDAQ:QQQ) surged 1.32 percent to 2,911.  The Russell 2000 (NYSEARCA:IWM) soared 1.69 percent to end the day at 939.

In other major markets, oil (NYSEARCA:USO) skyrocketed 3.40 percent to close at $33.49.

On London’s ICE Futures Europe Exchange, June futures for Brent crude oil  advanced by $1.80 (1.80 percent) to $101.75/bbl. (NYSEARCA:BNO, NYSEARCA:USO).

June gold futures advanced by $22.40 (1.55 percent) to $1,468.60 per ounce (NYSEARCA:GLD).

Read “Demand for Gold Bullion Coins Jumps Nine-Fold at U.S. Mint”

Transports popped the clutch on Thursday, with the Dow Jones Transportation Index (NYSEARCA:IYT) jumping 1.06 percent.

The “Draghi put” came to the rescue again on Thursday as the major European stock indices managed to make a modest advance despite a dismal April Eurozone Manufacturing PMI from Markit Economics (NYSEARCA:VGK).  In anticipation of the report, the European Central Bank cut its key interest rate from 0.75 percent to 0.50 percent.

The Euro STOXX 50 Index finished Thursday’s trading session with a 0.26 percent advance to 2,718 – remaining above its 50-day moving average of 2,653.  After breaking above its overhead resistance level of 2,700 on January 21, the STOXX 50 continues to test resistance at that level, which had been a barrier since the beginning of the year.

Read “European Stocks Advance after ECB Interest Rate Cut”

In Japan, stock prices fell as the yen continued to remain as strong as approximately 97.25 per dollar.  A stronger yen results in less-competitive prices for Japanese exports in foreign markets (NYSEARCA:FXY).  The Nikkei 225 Stock Average fell 0.76 percent to 13,694 (NYSEARCA:EWJ).

In China, stocks declined after the HSBC China Manufacturing PMI for April declined to 50.4 from 51.6 in March.  The result was consistent with the government’s official manufacturing PMI result for April, which declined to 50.6 from the March reading of 50.9.  The Shanghai Composite Index declined 0.17 percent to 2,174 (NYSEARCA:FXI).  Hong Kong’s Hang Seng Index fell 0.30 percent to 22,668 (NYSEARCA:EWH).

Technical indicators reveal that the S&P 500 remains above its 50-day moving average of 1,555 after hitting a new record-high close of 1,597.59 – motivating bears to suspect that we are watching the formation of a double-top, which would signal a decline.  Its Relative Strength Index advanced from 55.16 to 59.72.  Although the MACD crossed above the signal line last Thursday, it has yet to make a significant departure from there.  A break back below the signal line would suggest the likelihood of a decline.

Read “ECB Cuts Rates Sending Euro Up, Dollar Down, Futures Up”

For the day, all sectors finished solidly in positive territory except for the utilities sector, which declined by only 12 basis points.  The energy sector was the clear leader of the group, after taking a hard hit on Wednesday.

Consumer Discretionary (NYSEARCA:XLY):  +0.98%

Technology:  (NYSEARCA:XLK):  +1.18%

Industrials (NYSEARCA:XLI):  +1.12%

Materials: (NYSEARCA:XLB):  +0.67%

Energy (NYSEARCA:XLE):  +1.31%

Financials: (NYSEARCA:XLF):  +0.87%

Utilities (NYSEARCA:XLU):  -0.12%

Health Care: (NYSEARCA:XLV):  +1.11%

Consumer Staples (NYSEARCA:XLP):  +0.37%

Bottom line:  Stocks were back to setting new records again on Thursday after initial unemployment claims dropped to their lowest level since 2008. 

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European stocks made a modest advance on Thursday after the European Central Bank cut interest rates in the wake of increasingly negative economic data (NYSEARCA:VGK).

At the conclusion of the ECB governing council’s meeting, ECB president Mario Draghi announced that the bank would cut its key interest rate from 0.75 percent to 0.50 percent.  The good news outweighed a horrible final report on April Eurozone Manufacturing PMI from Markit Economics.  Nevertheless, Draghi’s further comments that the ECB was open to lowering the deposit interest rate to a negative number, sank the euro and sent stock prices falling into the red.  During the last hour of trading, stocks regained much of their lost ground after investors realized that Draghi was just speaking hypothetically about negative a interest rate.

Markit Economics reported that its final Eurozone Manufacturing PMI for April declined to 46.7 in April from 46.6 in March.  Because 50 is the borderline which distinguishes expansion from contraction, the Eurozone manufacturing PMI is demonstrating further contraction in an economy which has been enduring a prolonged recession.

The Euro STOXX 50 Index finished Thursday’s trading session with a 0.26 percent advance to 2,718 – remaining above its 50-day moving average of 2,653.  After breaking above its overhead resistance level of 2,700 on January 21, the STOXX 50 continues to test resistance at that level, which had been a barrier since the beginning of the year.  Its Relative Strength Index is 58.33 (NYSEARCA:FEZ).  The FTSE 100 Index rose 0.15 percent to 6,460 (NYSEARCA:EWU).

The German DAX Index climbed 0.61 percent to 7,961 (NYSEARCA:EWG).  France’s CAC 40 Index advanced 0.05 percent to 3,858 (NYSEARCA:EWQ).  Spain’s IBEX 35 Index declined 0.15 percent to 8,406 (NYSEARCA:EWP).  Italy’s FTSE MIB Index dipped 0.12 percent to 16,748 (NYSEARCA:EWI).

As of 12:58 EDT, the euro fell 0.85 percent against the dollar, trading at $1.3068 (NYSEARCA:FXE).

Spain’s ten-year bond yield declined to 4.07 percent on Thursday from Wednesday’s closing level of 4.12 percent (NYSEARCA:EWP).  Spain’s two-year bond yield dropped to 1.58 percent on Thursday from Wednesday’s closing level of 1.69 percent (NYSEARCA:EWP).

Italy’s ten-year bond yield fell to 3.80 percent on Thursday from Wednesday’s closing level of 3.92 percent (NYSEARCA:EWI).

On London’s ICE Futures Europe Exchange, June futures for Brent crude oil  advanced by $1.80 (1.80 percent) to $101.75/bbl. (NYSEARCA:BNO, NYSEARCA:USO).

June gold futures advanced by $22.40 (1.55 percent) to $1,468.60 per ounce (NYSEARCA:GLD).  Gold Goes Up as Draghi Says Negative Interest Rates Are Possible

In China, stocks declined after the HSBC China Manufacturing PMI for April declined to 50.4 from 51.6 in March.  The result was consistent with the government’s official manufacturing PMI result for April, which declined to 50.6 from the March reading of 50.9.  The Shanghai Composite Index declined 0.17 percent to 2,174 (NYSEARCA:FXI).  Hong Kong’s Hang Seng Index fell 0.30 percent to 22,668 (NYSEARCA:EWH).  The Chinese Economy is Very Important to the Global Economy

In Japan, stock prices fell as the yen continued to remain as strong as approximately 97.25 per dollar.  A stronger yen results in less-competitive prices for Japanese exports in foreign markets (NYSEARCA:FXY).  The Nikkei 225 Stock Average fell 0.76 percent to 13,694 (NYSEARCA:EWJ).

American stock index futures were in positive territory after the Department of Labor reported that initial unemployment claims had dropped to their lowest level since 2008.  The June 13 Dow Jones Industrials future advanced 0.17 percent to 14,676 as of 9:14 EDT.  The June 13 S&P 500 future rose 0.31 percent to 1,582 (NYSEARCA:SPY).  The June 13 Nasdaq 100 future climbed 0.38 percent to 2,874.

Bottom line:  Mario Draghi and the ECB governing council came to the rescue of the European stock market once again after a dismal April manufacturing PMI report from Markit Economics threatened to sink stock prices.   

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On Wednesday, critics of the Federal Reserve’s monetary policy saw some evidence demonstrating why the Fed is continuing with its quantitative easing program.  Of all the economic news released on Wednesday, even the good news was not all that good.  Although the final reading of the April Markit U.S. Manufacturing PMI declined to only 52.1 (instead of the expected 51.0) from the March reading of 54.6 it represented the weakest manufacturing expansion in six months.

The flood of bad news began with the ADP National Employment Report, which disclosed that only 119,000 private sector payroll jobs were added in April, despite expectations for an increase of 155,000 payroll jobs.  ADP:  Slower Growth for April Payrolls

The April Manufacturing ISM Report on Business from the Institute for Supply Management indicated that the PMI for April declined to 50.7 percent from 51.3 percent in March.

From the report:

The report was issued today by Bradley J. Holcomb, CPSM, CPSD, chair of the Institute for Supply Management™ Manufacturing Business Survey Committee. “The PMI™ registered 50.7 percent, a decrease of 0.6 percentage point from March’s reading of 51.3 percent, indicating expansion in manufacturing for the fifth consecutive month, but at the lowest rate of the year. The New Orders Index increased in April by 0.9 percentage point to 52.3 percent, and the Production Index increased by 1.3 percentage points to 53.5 percent. The Employment Index registered 50.2 percent, a decrease of 4 percentage points compared to March’s reading of 54.2 percent. The Prices Index registered 50 percent, decreasing 4.5 percentage points from March, indicating that overall raw materials prices remained unchanged from last month. Comments from the panel indicate a range of strong/steady growth, to flat/declining volumes, depending upon the particular industry.”

The Commerce Department’s Census Bureau reported that construction spending during March declined 1.7 percent below the revised February estimate, despite expectations of an increase by 0.6 percent.

From the report:

The U.S. Census Bureau of the Department of Commerce announced today that construction spending during March 2013 was estimated at a seasonally adjusted annual rate of $856.7 billion, 1.7 percent(±1.5%) below the revised February estimate of $871.2 billion. The March figure is 4.8 percent(±1.6%) above the March 2012 estimate of $817.8 billion.  During the first 3 months of this year, construction spending amounted to $181.7 billion, 4.7 percent (±1.6%) above the $173.6 billion for the same period in 2012.

PRIVATE CONSTRUCTION

Spending on private construction was at a seasonally adjusted annual rate of $598.4 billion, 0.6 percent (±1.2%) below the revised February estimate of $602.0 billion. Residential construction was at a seasonally adjusted annual rate of $294.9 billion in March, 0.4 percent (±1.3%)* above the revised February estimate of $293.8 billion. Nonresidential construction was at a seasonally adjusted annual rate of $303.5 billion in March, 1.5 percent (±1.2%) below the revised February estimate of $308.2 billion.

After investors had the opportunity to digest the bad economic news, the Federal Reserve had an easier time trying to convince the public of the need for more quantitative easing with the release of its FOMC Statement at the 2:00 conclusion of the Federal Open Market Committee meeting.  FOMC Statement 5/1/13

The major ETFs expected to respond to Wednesday’s economic reports are:

Consumer Staples Select Sector SPDR ETF (NYSEARCA:XLP):  -0.10%

SPDR S&P Homebuilders ETF (NYSEARCA:XHB):  -1.52%

Consumer Discretionary Select Sector SPDR ETF (NYSEARCA:XLY):  -0.53%

iShares Russell 2000 ETF (NYSEARCA:IWM):  -2.43%

Industrial Select Sector SPDR ETF (NYSEARCA:XLI):  -1.30%

Bottom line:  The release of the Federal Reserve’s FOMC Statement, which disclosed that quantitative easing would continue, was well-timed as it came on a day when the public received four disappointing economic reports and an upbeat report from Markit Economics, which was offset by the ISM report. 

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Wednesday’s disappointing economic reports sent the major stock indices into the red and gave the VIX a 7-percent boost.  After holding directly below its 50-day moving average for a week, Wednesday’s trading session sent the VIX back above its 50-day MA.  VIX now remains just 5 percent below its 200-day moving average of 15.26.  Its Relative Strength Index climbed from 48.34 to 52.37.  Although the MACD remains just below the signal line, it has now assumed an upward trajectory.  Crossing above the signal line is seen as suggesting a further advance.  Economic News Sends Market to the Downside

VIX ETF Update: 

Volatility Index – New Methodology (VIX): Index: 14.49,  +7.17%,

iPath S&P 500 VIX Short-Term Futures ETN (NYSEARCA:VXX):  +4.16%, This ETN is designed to track volatility in the markets as measured by the Chicago Board Options Exchange Market Volatility Index (CBOE Index), a popular measure of the implied volatility of S&P 500 index options.  The CBOE Volatility Index is also known as the “fear” index or “fear” indicator in markets.  The iPath S&P 500 VIX Short-Term Futures ETN (NYSEARCA:VXX) prices itself off of the average and implied volatility of the first two months of futures contracts of the S&P 500 Index.

VelocityShares Daily 2X VIX Short-Term ETN (NYSEARCA:TVIX):  +6.79%,  This ETN is designed to track 2X return on volatility in the markets as measured by the S&P 500 VIX Short-Term Futures Index.  The S&P 500 VIX Short-Term Futures Index measures the volatility of the S&P 500 Index via futures contracts as traded on the CBOE.

iPath S&P 500 VIX Mid-Term Futures ETN (NYSEARCA:VXZ):  +2.30%, This ETN is designed to track volatility in the markets as measured by the CBOE Volatility Index futures contracts.  The CBOE Volatility Index is also known as the “fear” index or “fear” indicator in markets.  The iPath S&P 500 VIX Mid-Term Futures ETN (NYSEARCA:VXZ) is priced from the average volatility of the 4^th through 7^th month futures contracts of the S&P 500 Index as traded on the CBOE.

S&P 500 Dynamic VIX ETN (NYSEARCA:XVZ):  +1.11%, This ETN is designed to track volatility in the markets as measured by the S&P 500 Dynamic VIX Futures Total Return Index.  The S&P 500 Dynamic VIX Futures Total Return Index seeks to combine results of volatility of the S&P 500VIX Short-Term Futures Index Excess Return and the S&P 500 VIX Mid-Term Futures Index Excess Return to create an accurate market volatility reading, as measured by the CBOE.

Velocity Shares Daily Inverse VIX Short-Term ETN (NYSEARCA:XIV):  -4.67%, This ETN is designed to inversely track the volatility in the markets as measured by the S&P 500 VIX Short-Term Futures Index.  The S&P 500 VIX Short-Term Futures Index measures the volatility of the S&P 500 Index via futures contracts traded on the CBOE.

Bottom line:  VIX investors finally got the break they were waiting for on Wednesday, as the VIX reversed course and headed to its highest closing level since April 19.   Not a Pretty Economy

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Wednesday’s batch of downbeat economic reports caused the stock market to retreat on Wednesday after the S&P 500 Index reached record-high closing levels on Monday and Tuesday.  The ADP National Employment Report disclosed that only 119,000 private sector payroll jobs were added in April, despite expectations for an increase of 155,000 payroll jobs.  The Commerce Department’s Census Bureau reported that construction spending during March declined 1.7 percent below the revised February estimate, despite expectations of an increase by 0.6 percent.

The Dow Jones Industrial Average (NYSEARCA:DIA) sank 138 points to hit 14,700 for a 0.94 percent drop.  The S&P 500 (NYSEARCA:SPY) fell 0.93 percent to close at 1,582.

The Nasdaq 100 (NASDAQ:QQQ) declined 0.49 percent to 2,873.  The Russell 2000 (NYSEARCA:IWM) took a 2.45 percent nosedive to end the day at 924.

In other major markets, oil (NYSEARCA:USO) sank 2.32 percent to close at $32.39.

On London’s ICE Futures Europe Exchange, June futures for Brent crude oil  declined by $2.58 (2.52 percent) to $99.79/bbl. (NYSEARCA:BNO, NYSEARCA:USO).

Read “Oil ETFs Slump on Weak Data”

June gold futures dropped by $16.40 (1.11 percent) to $1,455.70 per ounce (NYSEARCA:GLD).

Transports were in reverse on Wednesday, with the Dow Jones Transportation Index (NYSEARCA:IYT) falling 2.29 percent.

Many of the European stock exchanges were closed on Wednesday, due to the May Day holiday (NYSEARCA:VGK).

The Euro STOXX 50 Index finished Wednesday’s trading session with a 0.01 percent dip to 2,711 – staying above its 50-day moving average of 2,651.  After breaking above its overhead resistance level of 2,700 on January 21, the STOXX 50 is again testing resistance at that level, which has been a barrier since the beginning of the year.

Read “May Day Brings Limited Stock Trading”

In Japan, stock prices fell as the yen strengthened to 97.06 per dollar.  A stronger yen results in less-competitive prices for Japanese exports in foreign markets (NYSEARCA:FXY).  The Nikkei 225 Stock Average declined 0.44 percent to 13,799 (NYSEARCA:EWJ).

In China, both the Shanghai Stock Exchange (NYSEARCA:FXI) and the Hong Kong Stock Exchange (NYSEARCA:EWH) were closed for May Day.

Technical indicators reveal that the S&P 500 remains above its 50-day moving average of 1,554 after closing at 1,582 – motivating bears to suspect that we are watching the formation of a double-top, which would signal a decline.  Its Relative Strength Index declined from 61.63 to 55.16.  Although the MACD crossed above the signal line last Thursday, it never made a significant departure from there, changing its trajectory back downward.  A break back below the signal line would suggest the likelihood of a decline.

Read “Wall of Worries Wednesday – Will the Fed and ECB Push US Over?”

For the day, all sectors finished solidly in negative territory, although the consumer staples sector declined by only 10 basis points.  The materials sector and the energy sector took the hardest hits, falling 1.77 percent and 1.56 percent, respectively.

Consumer Discretionary (NYSEARCA:XLY):  -0.53%

Technology:  (NYSEARCA:XLK):  -0.91%

Industrials (NYSEARCA:XLI):  -1.30%

Materials: (NYSEARCA:XLB):  -1.77%

Energy (NYSEARCA:XLE):  -1.56%

Financials: (NYSEARCA:XLF):  -1.12%

Utilities (NYSEARCA:XLU):  -0.99%

Health Care: (NYSEARCA:XLV):  -1.06%

Consumer Staples (NYSEARCA:XLP):  -0.10%

Bottom line:  After better-than-expected economic data sent the S&P 500 Index to record-high closing levels, Wednesday’s disappointing economic reports sent the major stock indices into the red. 

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Most European stock exchanges were closed on Wednesday, due to the May Day holiday (NYSEARCA:VGK).   Trading continued in London, Tokyo and – of course – the United States.

Markit Economics reported that the April Markit/CIPS UK Manufacturing PMI advanced to 49.8 in April from 48.6 in March.  Because 50 is the borderline which distinguishes expansion from contraction, the UK manufacturing PMI is just on the edge of that threshold.

The Euro STOXX 50 Index finished Wednesday’s trading session with a 0.01 percent dip to 2,711 – staying above its 50-day moving average of 2,651.  After breaking above its overhead resistance level of 2,700 on January 21, the STOXX 50 is again testing resistance at that level, which has been a barrier since the beginning of the year.  Its Relative Strength Index is 58.33 (NYSEARCA:FEZ).  The FTSE 100 Index advanced 0.33 percent to 6,451 (NYSEARCA:EWU).

The German DAX Index is on hold at 7,913 because the Frankfurt Stock Exchange is celebrating the May Day holiday (NYSEARCA:EWG).  The Euronext Paris Stock Exchange was also closed on Wednesday, leaving France’s CAC 40 Index at Tuesday’s closing level of  3,856 (NYSEARCA:EWQ).  May Day was being celebrated in Madrid, leaving Spain’s IBEX 35 Index at Tuesday’s 8,419 (NYSEARCA:EWP).  The Borsa Italiana was also closed, leaving Italy’s FTSE MIB Index at Tuesday’s closing level of 16,767 (NYSEARCA:EWI).

As of 1:53 EDT, the euro advanced 0.24 percent against the dollar, trading at $1.3199 (NYSEARCA:FXE).

Spain’s ten-year bond yield declined to 4.11 percent on Wednesday from Tuesday’s closing level of 4.13 percent (NYSEARCA:EWP).  Spain’s two-year bond yield declined to 1.69 percent on Wednesday from Tuesday’s closing level of 1.70 percent (NYSEARCA:EWP).

Italy’s ten-year bond yield advanced to 3.92 percent on Wednesday from Tuesday’s closing level of 3.91 percent (NYSEARCA:EWI).

On London’s ICE Futures Europe Exchange, June futures for Brent crude oil  declined by $2.87 (2.80 percent) to $99.50/bbl. (NYSEARCA:BNO, NYSEARCA:USO).

June gold futures dropped by $21.90 (1.49 percent) to $1,450.20 per ounce (NYSEARCA:GLD).  Gold Stocks to Rebound in May

In China, the National Bureau of Statistics and China Federation of Logistics and Purchasing reported that the manufacturing Purchasing Managers’ Index for April declined to 50.6 from the March reading of 50.9.  The result fell short of analysts’ estimates of 50.7.  Both the Shanghai Stock Exchange (NYSEARCA:FXI) and the Hong Kong Stock Exchange (NYSEARCA:EWH) were closed for May Day.

In Japan, stock prices fell as the yen strengthened as high as 97.06 per dollar.  A stronger yen results in less-competitive prices for Japanese exports in foreign markets (NYSEARCA:FXY).  The Nikkei 225 Stock Average declined 0.44 percent to 13,799 (NYSEARCA:EWJ).  The Best of the “Other” Japan ETFs

American stock index futures were mixed ahead of Wednesday’s opening bell following a disappointing National Employment Report from ADP.  The June 13 Dow Jones Industrials future advanced 0.02 percent to 14,751 as of 9:22 EDT.  The June 13 S&P 500 future declined 0.24 percent to 1,588 (NYSEARCA:SPY).  The June 13 Nasdaq 100 future advanced 0.14 percent to 2,884.

Bottom line:  Wednesday’s limited trading saw stocks make a decent advance in London following a better-than-expected Markit/CIPS UK Manufacturing PMI for April.

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In this fast moving webinar, Wall Street Sector Selector discusses “sell in May,” fading macro economic data and technical indicators flashing red alerts for a summer slowdown.

The Dow Jones Industrial Average (NYSEARCA:DIA) and Nasdaq Composite (NYSEARCA:QQQ) are near record highs, but bonds (NYSEARCA:IEF) signal a flight to safety trade is  underway.  Why is this happening and what does it mean for your investments?

Learn about:

• The coming global economic slowdown
• Why Europe, China and Japan matter
• Can the central banks save the world again?
• The biggest triple top of all time?
• Critical divergences popping up in the S&P 500 (NYSEARCA:SPY)
• Sell in May? Why it works and why you need to pay attention
• Wall Street Sector Selector current portfolios and strategies
• How to protect yourself and seek profits now that it’s time to “sell in May and go away”

Join Wall Street Sector Selector’s April Webinar and find out if it’s time to “sell in May and go away!”

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After crossing below its 50-day moving average last Tuesday, the VIX has been holding directly below the 50-day moving average, without any significant departure to the downside.  On Tuesday, the VIX closed at 13.52, just below its 50-day moving average of 13.81.  Its Relative Strength Index declined from 49.10 to 48.34.   More important, although the MACD was holding just below the signal line, it has now assumed a more downward trajectory, which usually signals a further decline.  It is also barely above the zero line.  If the MACD crosses below the zero line, we will have another signal of a further decline.

Stock market volatility decreased on Tuesday after the S&P/Case-Shiller Home Price Index for February boosted investor confidence as its 20-City Composite rose 9.3 percent on a year-over-year basis, beating expectations for a 9.0 percent increase.  Although the Chicago Purchasing Managers’ Index (a/k/a the Chicago Business Barometer) for April fell 3.4 points to a 42-month low of 49.0, the result brought the reading barely into the sub-50 contractionary zone.  SPX Tests the High

The Conference Board’s Consumer Confidence Index jumped to 68.1 in April from 61.9 in March.  Economists had been expecting a more modest advance to 62.0.  This obviously had a suppressing effect on market volatility.

A review of the S&P 500 chart reveals that although the S&P 500 remains above its 50-day moving average of 1,552 with another record-high close at 1,597.57, there exists the possibility that that we are watching the formation of a double-top, which would signal a decline.  Although the MACD crossed above the signal line last Thursday, it has not made a significant departure from there.  A break back below the signal line would suggest the likelihood of a decline.  VIX investors will be watching the S&P 500 chart closely during the next few days to watch for hints of a potential swoon.  Market Near Record High, but Where Is the Revenue?

VIX ETF Update: 

Volatility Index – New Methodology (VIX): Index: 13.52,  -1.39%,

iPath S&P 500 VIX Short-Term Futures ETN (NYSEARCA:VXX):  -0.94%

VelocityShares Daily 2X VIX Short-Term ETN (NYSEARCA:TVIX):  -1.75%

 iPath S&P 500 VIX Mid-Term Futures ETN (NYSEARCA:VXZ):  -0.40%

S&P 500 Dynamic VIX ETN (NYSEARCA:XVZ):  -0.23%

Velocity Shares Daily Inverse VIX Short-Term ETN (NYSEARCA:XIV):  +1.10%

Bottom line:  The VIX fell a tad further below its 50-day moving average on Tuesday, after rising home prices and better-than-expected consumer confidence gave the bulls the fuel they needed to keep their momentum going as the S&P 500 rose to yet another record closing high on Tuesday.

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On Tuesday, the Conference Board’s Consumer Confidence Index jumped to 68.1 in April from 61.9 in March.  Economists had been expecting a more modest advance to 62.0.  Reports such as the Consumer Confidence Index and the University of Michigan’s Consumer Sentiment Index are closely watched as they are seen as forward-looking indicators on consumer demand.  Since the American economy is 70 percent consumer-driven, a good deal of attention is focused on this data.

From the report:

The Conference Board Consumer Confidence Index^®, which had declined in March, increased in April. The Index now stands at 68.1 (1985=100), up from 61.9 in March. The Present Situation Index increased to 60.4 from 59.2. The Expectations Index improved to 73.3 from 63.7 last month.

*   *   *

Consumers’ assessment of current conditions improved moderately in April. Those saying business conditions are “good” increased to 17.2 percent from 16.4 percent, while those stating business conditions are “bad” decreased to 28.1 percent from 29.1 percent. Consumers’ assessment of the labor market was mixed. Those claiming jobs are “plentiful” edged up to 9.8 percent from 9.5 percent, however those claiming jobs are “hard to get” increased to 37.1 percent from 35.4 percent.

Consumers were considerably more upbeat about the short-term outlook. The percentage of consumers expecting business conditions to improve over the next six months increased to 16.9 percent from 15.0 percent, while those anticipating business conditions to worsen decreased to 15.1 percent from 17.7 percent.

The S&P/Case-Shiller Home Price Index for February provided more evidence that the housing recovery is continuing.  The Case-Shiller 20-City Composite rose 9.3 percent on a year-over-year basis, beating expectations for a 9.0 percent increase.  ETF Strategy for Rising Rates:  Sector Allocation

From the report:

Data through February 2013, released today by S&P Dow Jones Indices for its S&P/Case-Shiller Home Price Indices, the leading measure of U.S. home prices, showed average home prices increased 8.6% and 9.3% for the 10- and 20-City Composites in the 12 months ending in February 2013. The 10- and 20-City Composites rose 0.4% and 0.3% from January to February.

All 20 cities covered by the indices posted year-over-year increases for at least two consecutive months. In 16 of the 20 cities annual growth rates rose from the last month; Detroit, Miami, Minneapolis and Phoenix saw slight annual deceleration ranging from -0.1 to -0.4 percentage points. Phoenix continued to stand out with an impressive year-over-year return of +23.0% while Atlanta and Dallas had the highest annual growth rates in the history of these indices since 1992 and 2001, respectively.

The Chicago Purchasing Managers Index is also known as the ISM-Chicago Business Survey, the MNI Chicago Report and the Chicago Business Barometer.  On Tuesday, the ISM Chicago released the Chicago Business Barometer for April, which fell 3.4 points to a 42-month low of 49.0.  A result below 50 indicates contraction.  The only Business Activity measure which did not weaken in April was New Orders.  Five of the seven Business Activity measures were in contraction.  Supplier Deliveries, Prices Paid, and Production reached their lowest levels since 2009.  ISM Manufacturing Index: April 2013 Preview

The major ETFs expected to respond to Tuesday’s economic reports are:

Consumer Staples Select Sector SPDR ETF (NYSEARCA:XLP):  -0.17%

SPDR S&P Retail ETF (NYSEARCA:XRT):  +0.62%

Consumer Discretionary Select Sector SPDR ETF (NYSEARCA:XLY):  +0.28%

iShares Dow Jones U.S. Real Estate ETF (NYSEARCA:IYR):  +0.98%

Industrial Select Sector SPDR ETF (NYSEARCA:XLI):  +0.07%

Bottom line:  Good news on improving consumer confidence in the face of the budget sequester as well as improving home prices signal continuing progress as the economy slowly recovers from the devastation caused by the financial crisis.  Although the Chicago Business Barometer fell to a 42-month low, at 49.0 it barely crossed into contractionary territory. 

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For the second consecutive day, economic news brought the S&P 500 to a new record-high closing level.  The S&P/Case-Shiller Home Price Index for February got the bulls running after its 20-City Composite rose 9.3 percent on a year-over-year basis, beating expectations for a 9.0 percent increase.

Although the Chicago Purchasing Managers’ Index (a/k/a the Chicago Business Barometer) for April fell 3.4 points to a 42-month low of 49.0, the disappointment was offset by good news from the Conference Board.  The Conference Board’s Consumer Confidence Index jumped to 68.1 in April from 61.9 in March.  Economists had been expecting a more modest advance to 62.0.  Reports such as the Consumer Confidence Index and the University of Michigan’s Consumer Sentiment Index are closely watched as they are seen as forward-looking indicators on consumer demand.  Since the American economy is 70 percent consumer-driven, a good deal of attention is focused on this data.

The Dow Jones Industrial Average (NYSEARCA:DIA) picked up 21 points to reach 14,839 for an 0.14 percent advance.  The S&P 500 (NYSEARCA:SPY) climbed 0.25 percent to finish at 1,597.56 for another record-high close.

The Nasdaq 100 (NASDAQ:QQQ) surged 0.71 percent to 2,887.  The Nasdaq Composite Index climbed 0.66 percent to close at its highest level since November of 2000:  3,328.79.  The Russell 2000 (NYSEARCA:IWM) rose 0.53 percent to end the day at 947.

In other major markets, oil (NYSEARCA:USO) sank 1.34 percent to close at $33.16.

On London’s ICE Futures Europe Exchange, June futures for Brent crude oil  declined by $2.24 (2.16 percent) to $101.57/bbl. (NYSEARCA:BNO).

Read “Crude Drops on Fears U.S. Demand May Be Waning”

June gold futures climbed by $8.50 (0.58 percent) to $1,475.90 per ounce (NYSEARCA:GLD).

Transports accelerated on Tuesday, with the Dow Jones Transportation Index (NYSEARCA:IYT) advancing 0.51 percent.

Most of the major European stock indices declined on Tuesday, after Eurostat’s April 30 report on unemployment disclosed that the unemployment rate in the Eurozone rose to 12.1 percent in March from 12.0 percent in February. (NYSEARCA:VGK).

The Euro STOXX 50 Index finished Tuesday’s trading session with a 0.20 percent dip to 2,712 – staying above its 50-day moving average of 2,649.  After breaking above its overhead resistance level of 2,700 on January 21, the STOXX 50 is again testing resistance at that level, which has been a barrier since the beginning of the year.

Read “Economic Data Continues to Hurt European Stocks”

Tuesday brought another “Abenomics” lift for Japan’s stock market after quarterly earnings reports demonstrated how the prime minister’s stimulus program is benefiting brokerage firms.  Nomura Equities reported a 300-percent profit surge for its best quarter in seven years.  The Nikkei 225 Stock Average advanced 0.17 percent to 13,860 (NYSEARCA:EWJ).

In China, the Shanghai Stock Exchange is closed until May 2 for the May Day holidays (NYSEARCA:FXI).  Hong Kong’s Hang Seng Index advanced 0.69 percent to 22,737 (NYSEARCA:EWH).

Technical indicators reveal that the S&P 500 remains above its 50-day moving average of 1,552 with another record-high close at 1,597.57 – motivating bears to hope that we are watching the formation of a double-top, which would signal a decline.  Its Relative Strength Index is at a healthy 61.63.  Although the MACD crossed above the signal line last Thursday, it has not made a significant departure from there.  A break back below the signal line would suggest the likelihood of a decline.

Read “Testy Tuesday – Drifting Along into the End of the Month”

For the day, most sectors finished solidly in positive territory with the technology sector taking a decisive lead.  The consumer staples sector and the healthcare sector were the only laggards which actually fell into the red, declining 17 percent and 75 percent, respectively.

Consumer Discretionary (NYSEARCA:XLY):  +0.28%

Technology:  (NYSEARCA:XLK):  +1.12%

Industrials (NYSEARCA:XLI):  +0.07%

Materials: (NYSEARCA:XLB):  +0.15%

Energy (NYSEARCA:XLE):  +0.40%

Financials: (NYSEARCA:XLF):  +0.27%

Utilities (NYSEARCA:XLU):  +0.27%

Health Care: (NYSEARCA:XLV):  -0.75%

Consumer Staples (NYSEARCA:XLP):  -0.17%

Bottom line:  Rising home prices and better-than-expected consumer confidence gave the bulls the fuel they needed to keep their momentum going as the S&P 500 rose to yet another record closing high on Tuesday. 

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European stocks declined on Tuesday, following some disappointing data from Eurostat (NYSEARCA:VGK).  Eurostat’s April 30 report on unemployment disclosed that the unemployment rate in the Eurozone rose to 12.1 percent in March from 12.0 percent in February.  In the greater 27-nation European Union, the unemployment rate remained at February’s level of 10.9 percent.

Eurostat also reported that its flash estimate of the Eurozone inflation rate declined to a three-year low of 1.2 percent in April from 1.7 percent in March.  Economists had expected a less-significant decline to 1.6 percent.  The worse-than-expected deflation has increased expectations that the European Central Bank governing council will lower interest rates when it meets on Thursday.  Many commentators have expressed the opinion that if the ECB does not cut interest rates this month, it may do so at its June meeting.  Reaction to Central Banks of Uppermost Importance

The Euro STOXX 50 Index finished Tuesday’s trading session with a 0.20 percent dip to 2,712 – staying above its 50-day moving average of 2,649.  After breaking above its overhead resistance level of 2,700 on January 21, the STOXX 50 is again testing resistance at that level, which has been a barrier since the beginning of the year.  Its Relative Strength Index is 60.29 (NYSEARCA:FEZ).  The FTSE 100 Index declined 0.43 percent to 6,430 (NYSEARCA:EWU).

The German DAX Index advanced 0.51 percent to 7,913 (NYSEARCA:EWG).  France’s CAC 40 Index declined 0.31 percent to 3,856 (NYSEARCA:EWQ).  Spain’s IBEX 35 Index fell 0.38 percent to 8,419 (NYSEARCA:EWP).  Italy’s FTSE MIB Index sank 0.96 percent to 16,767 (NYSEARCA:EWI).

As of 1:52 EDT, the euro advanced 0.38 percent against the dollar, trading at $1.3149 (NYSEARCA:FXE).

Spain’s ten-year bond yield declined to 4.13 percent on Tuesday from Monday’s closing level of 4.16 percent (NYSEARCA:EWP).  Spain’s two-year bond yield declined to 1.70 percent on Tuesday from Monday’s closing level of 1.81 percent (NYSEARCA:EWP).

Italy’s ten-year bond yield dipped to 3.92 percent on Tuesday from Monday’s closing level of 3.94 percent (NYSEARCA:EWI).

On London’s ICE Futures Europe Exchange, June futures for Brent crude oil  declined by $1.47 (1.42 percent) to $102.34/bbl. (NYSEARCA:BNO, NYSEARCA:USO).

June gold futures climbed by $4.50 (0.31 percent) to $1,471.90 per ounce (NYSEARCA:GLD).  Is the Gold Mining ETF Slump Over

In China, the Shanghai Stock Exchange is closed until May 2 for the May Day holidays (NYSEARCA:FXI).  Hong Kong’s Hang Seng Index advanced 0.69 percent to 22,737 (NYSEARCA:EWH).

Tuesday brought another “Abenomics” rally to Japan’s stock market after quarterly earnings reports demonstrated how the prime minister’s stimulus program is benefiting brokerage firms.  Nomura Equities reported a 300-percent profit surge for its best quarter in seven years.  The Nikkei 225 Stock Average advanced 0.17 percent to 13,860 (NYSEARCA:EWJ).

American stock index futures held close to the breakeven level ahead of Tuesday’s opening bell as investors anxiously awaited the reading of the Chicago Purchasing Manager’s Index and the Conference Board’s Consumer Confidence Index for April.  The June 13 Dow Jones Industrials future dipped 0.03 percent to 14,744 as of 9:12 EDT.  The June 13 S&P 500 future declined 0.06 percent to 1,587 (NYSEARCA:SPY).  The June 13 Nasdaq 100 future advanced 0.03 percent to 2,859.

Bottom line:  Disappointing economic data caused most of the major European stock indices to decline on Tuesday.  The stock swoon was mitigated by the fact that the ECB governing council will be meeting on Thursday, raising hopes that the downbeat data will result in another interest rate cut.

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With bonds yielding so little, the income portion of many portfolios has been the first to suffer. To compensate, investors have reached out to less traditional sources of portfolio income, including derivative strategy ETFs and MLP ETFs, but have we gone too far?

Three signs say yes:

1. Asset growth in income-producing ETFs
2. Income-focused ETF launches
3. Unlikely sources of yield

Many investors, especially retirees, depend on the income portion of their portfolio to provide the intermittent cash flows to fund expenditures. The policies pursued by the Federal Reserve have suppressed the yields on most fixed-income instruments to ultra-low rates, which has left many investors with insufficient cash flows.

To compensate, some investor portfolios have shifted to alternative forms of income or, rather, ETFs that happen to have high dividend yields. These include business development and private equity ETFs, derivative strategy ETFs, real estate ETFs and MLP ETFs, to name a few.

The need for cash flow is real and significant. ETF issuers have taken notice and are increasingly pitching their products as solutions. Take SLVO, for example, whose popular banner advertisements tout the product as “an opportunity for monthly cash flow.”

This has helped drive asset growth in these income-producing segments of the market, which leads me to my first sign that we may have gone too far.

1) Asset Growth

To identify 50 ETFs investors would be most drawn to for yield, I ranked all U.S.-listed ETFs by the trailing 12-month dividend yield that their underlying constituents would have contributed to the fund (note that this is not necessarily the yield that the fund actually distributed).

I then compared the assets under management growth in those funds to the AUM growth in the rest of the ETF market. The results:

The quest for yield is evident in this table: The “top-50” group saw AUM grow at three times the rate of the rest of the ETF market.

One could argue that the growth in AUM could be performance driven, as opposed to new assets allocated to those funds. However, my best estimates stake performance as responsible for only about one-fifth of the asset growth in the group titled “Top 50.”

The fact that AUM growth in the highest-yielding portfolios has outpaced the rest of the ETF market by three times could suggest the presence of a bubble in the “high-yield”/“anything income” market segments.

In the quest for yield, a disproportionate amount of assets have flowed to these securities and have potentially driven prices to lofty heights, which could prove dangerous if assets rotate back to traditional fixed income when rates are reasonable.

2) Product Launches

The second sign that we may have gone too far in the reach for yield is the lineup of ETF launches over the past year. Of the 214 product ETF launches since the beginning of 2012, nearly a quarter (over 50) are in income-focused ETFs.

To be fair, there’s a wide range of products that fall under that umbrella that I’ve categorized as “income focused,” which includes high-dividend-yield equity ETFs, high-yield fixed-income ETFs, MLP ETFs, private equity ETFs and preferred stock ETFs.

It’s not only the disproportionate number of “income-focused” ETF launches, but also their nature, many of which have become increasingly esoteric, risky or just downright expensive.

Take, for example, ALPS’ U.S. Equity High Volatility Put Write Index Fund (NYSEArca: HVPW), which aims to distribute 1.5 percent of its NAV every 60 days. The fund writes 60-day listed put options on the 20 most volatile (demand highest premium) mid- to large-cap securities.

I won’t say it’s like picking up pennies in front of a steamroller, because 1.5 percent every 60 days is a juicy yield; rather, it’s like picking up $100 bills in front of a steamroller. A steamroller can incur some steep medical expenses.

Another example is Van Eck’s Market Vectors BDC Income ETF (NYSEArca: BIZD), which tracks an index of publicly traded business development (private equity) companies. Investors are buying shares of an ETF that buys into private equity firms that in turn buy ownership in individual private or thinly traded companies.

The multiple layers of management help explain, although not justify, the fund’s astronomical expense ratio (7.56 percent), which is currently the highest expense ratio of any U.S.-listed ETF.

3) An Unlikely Source of Yield

My final point as to how we’ve gone too far in the search for yield is the suggestion I’m about to make. It’s self-fulfilling but intriguing nonetheless.

Several funds generate high dividend yields without their underlying securities generating any dividends.

How? From securities-lending revenue: Some ETFs hold securities that are highly sought after in the loan market for short-sellers; for example, and thus generate superior revenues from lending those securities.

In some cases, those securities-lending revenues are sufficient to deliver a hefty dividend yield to ETF holders.

Which portfolios?

It’s hard to say which securities will be the most highly sought after by short-sellers moving forward, but some of the past favorites appear to be ETFs with renewable energy stocks or mining stocks.

I’m not suggesting that most investors jump in front of a metaphorical wrecking ball that could be a tide of short-sellers, but if you have a well-founded conviction in the sector, it could be a double whammy: current income and future growth.

Ultimately, there are several signs that we may have already overstretched our reach for yield. ETF products such as the high-volatility put-write product enforce my conviction as does the rapid growth of the “income-focused” ETF market in general. Be wary of any promises or suggestions of yield and, as always, be sure to fully understand the risks involved.

At the time this article was written, the author held no positions in the securities mentioned. Contact Spencer Bogart at sbogart@indexuniverse.com.

After crossing below its 50-day moving average last Tuesday, the VIX has been holding directly below the 50-day MA, without any significant departure to the downside.  On Monday, the VIX closed at 13.71, just below its 50-day moving average of 13.79.  Its Relative Strength Index increased from Friday’s 48.71 to 49.10.  More important, although its MACD was holding just below the signal line, it has now assumed a more downward trajectory, which usually signals a further decline.  Five Reasons Why This Will Remain a Traders’ Market

Monday’s economic reports brought bullish investors another “risk on” day, which sent the S&P 500 to a new record-high close at 1,593.61 which edged out its previous record high close of 1,593.37, set on April 11.  Nevertheless, there was enough economic data to add some volatility to the stock market, with the VIX advancing 0.73 percent to 13.71.  Although the Commerce Department’s Bureau of Economic Analysis reported that personal spending increased by twice the amount expected, personal income rose by only half as much as expected (0.2 percent).

Another factor which contributed to stock market volatility was the Dallas Fed’s Texas Regional Manufacturing Outlook Survey for April, which disclosed that its general business activity index plunged from 7.4 in March to negative 15.6 in April, its lowest level since last July.  Economists had been expecting a less-significant decline to positive 5.0.  Structural Comparison of Current Bull Market to 2007 Rally

VIX ETF Update: 

Volatility Index – New Methodology (VIX): Index:  13.71,  +0.73%,

iPath S&P 500 VIX Short-Term Futures ETN (NYSEARCA:VXX):  -0.57%, This ETN is designed to track volatility in the markets as measured by the Chicago Board Options Exchange Market Volatility Index (CBOE Index), a popular measure of the implied volatility of S&P 500 index options.

VelocityShares Daily 2X VIX Short-Term ETN (NYSEARCA:TVIX):  -0.70%, This ETN is designed to track 2X return on volatility in the markets as measured by the S&P 500 VIX Short-Term Futures Index.

iPath S&P 500 VIX Mid-Term Futures ETN (NYSEARCA:VXZ):  -0.54%, This ETN is designed to track volatility in the markets as measured by the CBOE Volatility Index futures contracts.

S&P 500 Dynamic VIX ETN (NYSEARCA:XVZ):  -0.56%, This ETN is designed to track volatility in the markets as measured by the S&P 500 Dynamic VIX Futures Total Return Index.

Velocity Shares Daily Inverse VIX Short-Term ETN (NYSEARCA:XIV):  +0.49%, This ETN is designed to inversely track the volatility in the markets as measured by the S&P 500 VIX Short-Term Futures Index.

Bottom line:  Although the S&P 500 Index reached a new record closing high on Monday following better-than-expected economic news, which indicated that both personal spending and pending home sales increased twice as much as expected during March, personal income increased by only half the expected amount.  That result, along with the severe decline in the Dallas Fed’s Texas Regional Manufacturing Outlook Survey for April allowed the VIX to make a 0.73 percent advance.   

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Instead of rallying in spite of economic news, the S&P 500 reached a new record-high closing level on Monday because of economic news.  The Commerce Department’s Bureau of Economic Analysis reported that although personal income increased by only half as much as expected (0.2 percent), personal consumption expenditures (PCE) rose by twice as much as expected (0.2 percent).  More good news came from the National Association of Realtors, which disclosed that its Pending Home Sales Index rose more than twice as much as expected, to 1.5 during March

The Dow Jones Industrial Average (NYSEARCA:DIA) jumped by 106 points to reach 14,818 for an 0.72 percent advance.  The S&P 500 (NYSEARCA:SPY) also rose 0.72 percent to close at 1,593.61, edging out its previous record high close at 1,593.37, set on April 11.

The Nasdaq 100 (NASDAQ:QQQ) surged 0.93 percent to 2,866.  The Nasdaq Composite Index climbed 0.85 percent to close at its highest level since November of 2000:  3,307.02.  The Russell 2000 (NYSEARCA:IWM) rose 0.77 percent to end the day at 942.

In other major markets, oil (NYSEARCA:USO) skyrocketed 1.51 percent to close at $33.61.

On London’s ICE Futures Europe Exchange, June futures for Brent crude oil  advanced by 64 cents (0.62 percent) to $103.80/bbl. (NYSEARCA:BNO).

June gold futures climbed by $19.70 (1.36 percent) to $1,473.30 per ounce (NYSEARCA:GLD).

Read “Gold Continues Its Return”