Europe, Global Markets On Edge

U.S. stocks and ETFs rallied strongly last week on the strength of positive economic and employment reports, but Europe poses an ever-growing threat to the global financial recovery.






In the chart of the S&P 500 (NYSEARCA:SPY), above, we see that the major U.S. index has now reached very overbought levels as represented by a reading greater than 70 on RSI.  It has also approached significant resistance levels reaching back to last spring and summer.  Conditions like these typically lead to measurable and possibly significant declines.

The Economic View From 35,000 Feet

Global stock markets and major U.S. indexes and ETFs like the SPDR Dow Jones Industrial Average ETF (NYSEARCA:DIA) made substantial gains last week, with the Dow Jones rising 1.6%, its best level in 3 1/2 years.  The S&P 500 (NYSEARCA:SPY) followed suit with weekly gains of 2.2%.

Economic news was mixed. On the plus side we saw improvements in ISM, Construction Spending, and particularly the Non Farm Payrolls and Unemployment Report on Friday.  On the down side, home prices continue to slide, Chicago PMI was down, consumer confidence declined and Factory Orders fell.

The Financial Sector ETFs like Financial Select SPDR (NYSEARCA: XLF) were supported by encouraging words from Fed Chairman Ben Bernanke and the hope for a speedy resolution to the Greek crisis.

However, as the weekend wore on, Greece continued its struggle to get to a deal with the “troika” of the European Central Bank, European Union and International Monetary Fund, and these ongoing delays put Europe and the world on the mountain’s edge of success or failure.

Major ETFs tracking Europe like iShares Euro 350 (NYSEARCA: IEV) and iShares Germany (NYSEARCA: EWG) rallied strongly last week but remain vulnerable to a “Greek shock,” as do our major indexes.

This week will be light on economic reports with job openings and consumer credit on Tuesday, weekly employment reports on Thursday and consumer sentiment on Friday.  We’ll also get earnings reports from important companies like YUM, LinkedIn, Visa, Cisco, Pepsi, Coke and Disney which are always trend setters for future economic activity.

Bottom line: Conditions in the United States continue to improve in a slow and choppy manner while conditions in Europe deteriorate and Greece moves towards an impasse with the European Union.  Failure to defuse the Greek crisis could well push global financial markets over the edge.

Disclaimer:  Wall Street Sector Selector actively trades a wide range of exchange traded funds (ETFs) and positions can change at any time.