All Eyes On The S&P 500 ETF

ETF Outlook for Friday, August 1, 2014

Stock markets around the world got shellacked yesterday as a plethora of negative news sent investors running for the exits. No one overwhelming factor sent the markets down; it was more a case of death by a million paper cuts.

The market had to digest some poor earnings reports, the biggest drop in Chicago PMI since 2008, a major Portuguese bank blowing up, Argentina defaulting on debt, more fighting in Gazaand the prolonged situation with Russia. In combination it was enough to trigger the plunge.

This morning the market is on the defensive once again. Dow futures were down nearly 100 points with two hours until the opening bell.

At 8:30 a.m. the background worries were overshadowed by the monthly jobs report. The government announced 209,000 jobs were added in July, well below the consensus expectation of 255,000 jobs that itself would have been a slight decrease from last month.

SPDR S&P 500 ETF (NYSE:SPY)

Today the action to watch is the overall U.S. stock market, which is in the midst of an overdue pullback from an all-time high. Many investors are not taking the selling well making SPY the ETF to watch.

The two percent sell-off in the shares of SPY yesterday were not only significant for the magnitude of the move, but also because the ETF closed below the 50-day moving average. The ETF closed at $193.09, well below the $195.37 where the indicator is located.

This is not the first breakdown; it has occurred four other times in the last year. The average amount of time it has traded below the 50-day moving average is nine days, and each time it was followed by a rally to a new all-time high.

The next level to watch is the 200-day moving average, which the ETF has traded above for nearly the entire bull market. The indicator is currently at $185.78, and it continues to increase on a daily basis.

If the ETF were to drop all the way to this level today it would seem dramatic, but it would be a pullback of less than 7 percent from the all-time high. In the big picture such a pullback is healthy and in no means the beginning of the end for the bull market.