ETF Outlook for the Week of October 7

The S&P 500 was able to close out last week with a one-point loss even though the government shutdown continued into the weekend.

It appears investors believe the politicians will come to an agreement sooner rather than later or they have turned their attention to earnings season that is about to begin this week. It is guaranteed that big earnings announcements will be released this week, however an end to the government shutdown does not look as promising.

Charting the S&P 500

From a technical perspective, the S&P 500 is looking bullish heading into the new week. The index has been able to hold above the 50-day moving average for the last few days after a three percent pullback from the most recent all-time high. The index closed last week at 1690, above the 50-day moving average of 1680 and price support at 1677.

While the longer-term chart of the S&P 500 is promising, the extremely short-term is raising red flags. When the S&P 500 futures began trading on Sunday they immediately began to fall in value. The chart below shows the selling that occurred and is an indication that investors are beginning to worry about the government shutdown.

Earnings

This week marks the official start of the third quarter earnings season with Alcoa (NYSE:AA) kicking things off on Tuesday after the closing bell. Over the next few weeks a large portion of the S&P 500 components will report earnings that will add to the volatility of the overall stock market. The beauty of ETFs is that the diversification they offer removes any company-specific risk, such as earnings four times per year.

Investors that are searching for an ETF that focuses on earnings could look at the WisdomTree Earnings 500 Index ETF (NYSE:EPS). The ETF tracks an earnings-weighted index of the largest 500 companies in the U.S. Most indices will base their holdings on market capitalization, but with EPS it puts a larger importance on past earnings. In 2013, EPS is slightly beating the return of the S&P 500 by 60 basis points.

Washington, DC

Even though earnings are the number one factor behind investors putting money into the market over the long-term, this week the driver of stocks will be Washington, DC. Until the government shutdown is over and the debt ceiling is figured out, the day-to-day action in stocks will be driven by the news out of DC.

This adds another wrinkle to the investment decision of investors and could lead to frustration and emotional decisions. The key will be to look at the market over the long-term and attempt to ignore the rhetoric coming out of the politicians.

A few of the ETFs that could be affected by the situation in Washington, DC include the PowerShares DB US Dollar Index Bullish ETF (NYSE:UUP), the SPDR Gold ETF (NYSE:GLD), and theiShares Dow Jones U.S. Aerospace & Defense Index ETF (NYSE:ITA).

New Bull Market in Spain

A country that many investors left for dead has risen out of the ashes and has moved into bull market territory. The iShares MSCI Spain ETF (NYSE:EWP) is up 30 percent since the early July low and is trading at the best level in nearly two years.

The Fed is not the only game in town, the European Central Bank (ECB) has also said they will do whatever it takes to keep to preserve the Euro. This has led to the beaten down Western European countries leading the way in 2013.

The outperformance by EWP has been driven by its heavy exposure to the Spanish banks. Investors that would like focus solely on the European banks have an ETF to achieve just that. The iShares MSCI Europe Financials ETF (NYSE:EUFN) is up 17.6 percent in 2013 and is lagging the S&P 500, however the upside potential is much higher. The ETF is heavily weighted in the U.K. (33 percent) and has 10 percent in Spanish banks.

ETF Chart of the Week XES

With the S&P 500 trading off the 2013 high, there are several ETFs showing relative strength and moving higher in spite of the government shutdown. The SPDR S&P Oil & Gas Equipment & Services ETF (NYSE:XES) closed at the best level in two years on Friday.

The price of oil is well off the yearly high and the large-cap energy stocks have underperformed. That is what makes the relative strength of XES even more impressive. The key in the coming weeks will be a confirmation of the breakout with several closes above the $43.00 level.