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U.S. Index ETFs Continue January Rally

In an overbought market, indicators are bullish but challenges remain


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U.S. stock indexes and index ETFs put in a strong showing on Friday and for the week, moving higher in spite of mixed economic reports and overbought technical indicators.

On My ETF Radar

In the chart of the S&P 500, we can see how RSI has returned to overbought levels above 70 which is where it has been for the last two weeks.  Momentum is slowing as represented by MACD, but the trend remains strongly positive on a near term basis.

Economic reports were mixed last week and we’re coming into the worst month of the year during post Presidential election years.  Seasonality, along with the upcoming “Fiscal Cliff 2″ debate, will likely put more headwind into the U.S. financial scene.  Furthermore, Q4 GDP came in negative last week and if this estimate is confirmed, will cast an even longer shadow over the economic and financial landscape going forward.

VIX, the CBOE S&P 500 Volatility Index, also known as the “fear index,” fell sharply on Friday with a 9.66% drop to close at 12.90, far below its historical average of 20, as the index lost a significant portion of its recent rally.  VIX ETFs also were significant movers on Friday:

  • iPath S&P 500 Short Term VIX Futures (NYSE:VXX) -5.14%
  • VelocityShares Daily 2X VIX Short Term ETN (NYSE:TVIX) -8.24%

Earnings season is more than half over and earnings reports have beaten expectations with almost 75% of reporting companies issuing better-than-expected reports.

Year to date, the S&P 500 has gained 6.1% while the Dow Jones Industrial Average has climbed 6.9%.

On an annual basis, these kinds of gains would equate to 70-80% for the year, and it’s fairly certain that the final tally for 2013 won’t be at those lofty levels.  This tells us, as discussed above, that major U.S. index ETFs and stocks are very overbought and considerably ahead of themselves year to date.  Nevertheless, bullish sentiment and buying can continue for sometime with markets remaining overbought until fundamentals once again take hold.

Bottom Line:

After a heady start to 2013, major index ETFs and stock indexes approach all time highs, long term resistance, overbought levels and fundamental resistance.  While the economic data continues to improve, new challenges lie ahead.


For the week beginning February 3, 2013, Wall Street Sector Selector will sell its position in VelocityShares Daily Inverse XIV (NYSE:XIV) at market open 2/4/13 and hold its position in ProShares Short 20+  Year Treasury (NYSE:TBF) from $29.62.

Wall Street Sector Selector is “yellow flag” mode, expecting sideways action/consolidation/correction ahead.

Read on for my past alerts on trading the VIX and VIX ETFs:

Disclaimer: VIX ETNs are extremely volatile and can easily sustain large gains or losses. Risk management and position size are extremely important. Read the prospectus to understand the potential risks and rewards. It is possible to lose your entire investment. The content included herein is for educational and informational purposes only, and readers agree to Wall Street Sector Selector’s Disclaimer, Terms of Service, and Privacy Policy before accessing or using this or any other publication by Wall Street Sector Selector or Ridgeline Media Group, LLC.

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