The bulls are getting stronger, and last week was another strong week on Wall Street. Last Friday, Oct 2, 2015, I wrote,
Last week was a very big and important week on Wall Street! Stocks opened lower but closed higher for the week after the S&P 500 and Russell 2000 “tested” Aug’s low. Aug’s low for the S&P 500 was 1867 and last week’s low was 1871. The small-cap Russell 2000 actually broke below Aug’s low on Monday but closed above it on Friday. That’s a bullish event and stages the way for a new double bottom pattern to form. There were two bullish catalysts for Wall Street: First, technically, Aug’s lows were 'tested' and defended. Second, fundamentally, the bulls were able to breathe easier because the weaker-than-expected jobs report pushed back an imminent rate hike from the Fed. At this point, Wall Street is ready for a rate hike but Main Street clearly is not. So the easy money trade is alive and well (for now).”
The market rallied nicely last week and is now flirting with resistance of its latest seven-week (post-August) trading range. This is bullish for the short and intermediate term. Longer term, the bulls need the S&P 500 to trade above 2020 and then 2040. Right now, support is 1867 and resistance is 2040. Until either level breaks we expect this sloppy action to continue. We are entering earnings season and will turn more bullish if leadership emerges. In the short term, the market is extended to the upside and due for a little pullback here to digest the recent and strong rally off support.
Monday-Wednesday’s Action: Stocks Rally Into Resistance
Stocks rallied nicely on Monday as investors returned in a buying mood from Friday’s jobs report rally. The PMI service index slowed to 55.1, missing estimates for 55.8. The ISM service index also slowed to 56.9, missing estimates for 58. This is the latest round of slower-than-expected economic data which followed September’s tepid jobs report. This confirms our thesis that Main Street simply is not ready for a rate hike, even though Wall Street is ready. Stocks opened higher on Tuesday, but quickly turned lower after the major averages encountered resistance near their declining 50 DMA lines. Biotechs dragged the market lower (again) and were down another six percent.The International Monetary Fund (IMF) trimmed its global growth forecast for 2015 from 3.3% to 3.1%. The IMF said weakness in emerging markets are weighing on the global economy.
Stocks edged higher on Wednesday as the major indices flirted with their respective 50 DMA lines. Commodities, materials and transportation stocks led the market higher as they continued to bounce from deeply oversold levels. The weekly MBA Mortgage Index surged 25.5% which followed last week’s decline of 6.7%.
Thursday-Friday’s Action: Stocks Rally After Fed Minutes
Stocks rallied on Thursday after the Fed released the minutes of its September meeting. The Fed voted 9-to-1 to keep rates at zero in September and the minutes showed Fed officials remain concerned about global weakness. China’s stock market reopened after being closed for a week due to a Chinese national holiday. Deutsche Bank announced a $7B loss on its two largest divisions. The Bank of England and the ECB held rates steady and continued their easy money stance. Initial Weekly Claims fell to 263k and beat estimates for 275k. Stocks were quiet on Friday as the S&P 500 rallied right into resistance (2020).
Market Outlook: Sideways Action Continues
Every bull market in history has a definitive beginning and an end. It is important to note that with each day that passes, we are getting closer to the end and further away from the beginning. This bull market is aging by any normal definition and celebrated its sixth anniversary in March 2015. The last two major bull markets ended shortly after their fifth anniversary; 1994-2000 & 2002-Oct 2007. As always, keep your losses small and never argue with the tape.
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