The major U.S. indexes moved higher over the past week despite mounting concerns over a government shutdown, record-setting equity valuations and weak inflation. Earlier this week, the Federal Reserve indicated that the economy and inflation were expanding at a modest to moderate pace. The central bank is widely expected to continue increasing interest rates this year despite overall inflation remaining below its 2% target rate. The S&P 500 P/E ratio spiked to 26.17x this week, which is its highest level since the 2007-2008 financial crisis and the dotcom boom.
International markets were mixed over the past week. Japan's Nikkei 225 rose 0.61%; Germany's DAX 30 rose 1.43%; and Britain's FTSE 100 fell 0.64%. In Europe, stock markets rose to their highest levels since 2008 amid growing confidence in corporate earnings and the strength of the global economy. In Asia, Japan upgraded its assessment of the economy for the first time in seven months amid a rise in consumer spending. Japan's central bank hopes that the increase in spending will translate to a pickup in inflation this year. (See also: Why the 1929 Stock Market Crash Could Happen in 2018.)
The SPDR S&P 500 ETF (ARCA: SPY) rose 0.9% over the past week. After breaking out from upper trendline resistance, the index reached new all-time highs this week. Traders should watch for an extended breakout to fresh highs next week or a move lower to retest trendline support that stands at around $275.00. Looking at technical indicators, the relative strength index (RSI) moved modestly lower to 81.21 but remains in overbought territory, while the moving average convergence divergence (MACD) experienced an acceleration of its bullish upswing that could signal greater upside ahead.
The SPDR Dow Jones Industrial Average ETF (ARCA: DIA) rose 1.02% over the past week. After breaking out from trendline resistance earlier this year, the index gave up some ground by the end of the week. Traders should watch for a move lower to retest trendline support at around $257.50 or for a rebound to fresh all-time highs. Looking at technical indicators, the RSI appears overbought at 84.63, but the MACD experienced an acceleration in its uptrend that could point to greater upside potential over the coming week.
The Invesco QQQ Trust (NASDAQ: QQQ) rose 1.12% over the past week, making it the best performing major index. After breaking out from trendline and R2 resistance earlier this month, the index closed the week just below its all-time highs. Traders should watch for some consolidation given the doji star pattern or a further breakout toward fresh all-time highs. Looking at technical indicators, the RSI appears overbought at 79.32, but the MACD remains in a robust uptrend that suggests more upside ahead. (For more, see: Ally Invest: Retail Investors Bullish, Still Love FAANG Stocks.)
The iShares Russell 2000 Index ETF (ARCA: IWM) rose 0.28% over the past week, making it the worst performing major index. After briefly touching R2 resistance at $158.46, the index moved sideways throughout most of the week. Traders should watch for a breakout from R2 and upper trendline resistance to fresh all-time highs or for a breakdown from lower trendline and R1 support at $155.46. Looking at technical indicators, the RSI appears a bit lofty at 66.31, while the MACD has trended sideways over the past couple of months.
The Bottom Line
The major indexes moved higher over the past week, but RSI readings suggest that prices may be overextended. Next week, traders will be closely watching several key economic indicators, including existing home sales on Jan. 24, new home sales on Jan. 25 and GDP data on Jan. 26. The market will also be keeping a close eye on the developments regarding a potential government shutdown. (For additional reading, check out: 10 Stocks That Can Outperform in 2018: Goldman.)
Note: Charts courtesy of StockCharts.com. As of the time of writing, the author had no holdings in the securities mentioned.