Major index ETFs posted a rally on Tuesday to reclaim part of Monday’s sell off with the Dow Jones Industrial Average (NYSEARCA:DIA) gaining 0.84%, the S&P 500 (NYSEARCA:SPY) adding 0.61%, the Nasdaq 100 (NYSEARCA:QQQ) climbing 0.45% and the Russell 2000 (NYSEARCA:IWM) moving up 0.47%.

In other major markets, gold (NYSEARCA:GLD) rallied 0.82% to close at $1592.50/oz and oil (NYSEARCA:USO) fell 1.17% to $92.18/bbl.

The big news for stocks and ETFs today was Fed Chairman Ben Bernanke’s testimony to Congress in which he supported quantitative easing programs and gave no indication that current programs were going to be ending anytime soon.

He staunchly defended the benefits of the Fed’s asset buying program but also warned about the potentially negative effects on U.S. stocks and ETFs arising from the upcoming government spending cuts scheduled to go into effect on Friday.

As the clock continues to click towards the Friday deadline, it appears more and more likely that the sequestration cuts will go into effect, at least for a time, as both sides appear no closer to a compromise…

Democratic Senate Leader Harry Reid said that, absent an agreement on increased revenue, the sequester should go on as scheduled, while Republicans stuck to their position of no additional taxes in any upcoming deal.  President Obama continued campaigning for his plan at a Virginia shipyard and both sides blamed each other for the stalemate and upcoming cuts.

Overseas, Italy had a bad day in the aftermath of its election which appears to have resulted in a hung Parliament as its stock market dropped 4+% and its 10 year bond yields spiked to 4.9%, a gain of more than 9%.

In economic reports, new home sales spiked higher to 437,000 for January, widely beating expectations and last month’s 378,000, and consumer confidence for February climbed sharply to 69.6, up from January’s reading of 58.4.

Tomorrow’s lone economic data point is the January durable goods orders and so investors will be watching for movement in the sequestration spending cuts standoff as Friday approaches.

Bottom line: Stocks and ETFs remain vulnerable to unknown consequences from the upcoming sequestration deadline and uncertainty over the political and economic future of Italy.

Investing Insights to Explore Now: ETF Trading Signals>>

John Nyaradi is the author of The ETF Investing Premium Newsletter.