The major U.S. stock market indices are up an average of +16% in the last nine trading days. I'm looking at a move from the Tuesday, October 4th low. That's over a year's worth of movement in two weeks. The first week no one believed the advance calling it a bear-market rally. That's not too surprising since two weeks ago the S&P 500 did hit bear market levels. The small caps had been in a bear market for days. Yet this past week the disbelief turned into a panic as stocks continued to rise. Mutual fund managers only had three weeks left before the end of their fiscal year and the chase for performance was on!

Fueling the move was a wave of generally positive news coming out of Europe. Monday started the week of strong as investors reacted to last week's headlines that Germany's Merkel and France's Sarkozy were committing to a comprehensive rescue plan by the end of October. It wasn't smooth sailing all week in Europe. There was a little drama with Slovakia and whether they would vote to approve the expanded EFSF bailout fund. Overall the news flow was positive as the EU rushed to come up with some sort of plan to recapitalize their major banks. The euro currency soared and the dollar posted another weekly loss (it's now down two weeks in a row).

Economic data in the U.S. was generally positive and if it wasn't investors ignored it. The August trade deficit came in slightly smaller than expected at $45.6 billion. Weekly initial jobless claims were in-line with expectations near 400,000. The real surprise was September retail sales. The Commerce Department said sales rose +1.1%, which is the best showing since February. The gain followed a +0.3% rise in August. You've heard it a million times that 70% of the U.S. economy is fueled by consumer spending. This report helped ease concerns that the U.S. was slipping closer to a recession. The odd thing here is that strong consumer spending is not lining up with the dour consumer sentiment. We saw this last month too.

Consumer sentiment is in the tank. The headline sentiment number sank to 57.5, down from 59.4. This reading and the August reading near 55 are the lowest non-recession levels ever. Why is there a disconnect between consumer attitudes and their spending? It could be persistently high unemployment, the lack of improvement in the housing market and prior to October a ugly stock market didn't help. Traditionally a sentiment reading above 90 was considered healthy.

This past week did kick off the Q3 earnings season. Dow-component Alcoa (AA) disappointed again. Yet the stock didn't see much of a sell-off. JPM spiked prior to its earnings report but investors sold the news anyway even though JPM beat estimates. This put a wet blanket on financials on Thursday. Thursday night technology giant Google Inc. (GOOG) reported earnings that crushed the estimate. Shares of GOOG soared from $550 to $600 but eventually pared its gains to settle up +$33 on Friday.

Europe & Greece

I would love for the market to change its focus from Europe to Q3 earnings results but that's unlikely. Don't misunderstand me. The Q3 numbers are very important but they will still take a back seat to any major headline out of the EU. Two weeks ago the focus was on a Oct. 13th meeting by the EU on whether they would provide Greece with another 8 billion euros of rescue money. It was believe that Greece would be bankrupt without it by Oct. 17th. That changed last weekend. The meeting was delayed and Greece found some loose change under their couch and suddenly could make it another few weeks.

Now the focus is this coming Sunday. There is a major EU Summit on what to do about Greece and how to protect the EU banks. Let's be more specific here. It's probably a summit on how can they let Greece default without crashing their banking system. The most recent headline suggested that the EU, the IMF and the ECB were trying to come up with some way to let Greece write down their bond debt to 50% of their current value in such a way that would not be considered a default, which would trigger a waterfall of debt default swaps throughout the region and across the globe (a.k.a. financial Armageddon for Europe).

If you are a glass is half-full kind of person then the good news here is that the EU seems to be cooperating as they focus on how to protect their banking system from collapse, at least as well as a union of 17 different countries can cooperate. If you're a glass is half-empty person then so far all we have is a bunch of politicians and promises. The Eurozone has been talking about this problem for almost two years now. They only reason they're working together now is because they can actually see the edge of the cliff this problem is pushing them towards. If they don't solve it correctly then they're going to trade a Greece-sized cliff for a Spain or Italy-sized cliff, which are much, much higher. At the moment any rescue plans are desperately short of details and the stock market usually hates the unknown. Currently this rally has been fueled by hope (and for the bears, then it's fear) that Europe will actually solve this problem.

There is no doubt that the global markets will be sensitive to any headlines this week as we approach the summit next weekend. After a +16% rally in stocks there could be a sell-first, ask questions later attitude by market participants.

Major Indices:

The rebound in stocks really has been impressive. The S&P 500 is up +13.9% from its October low. The XLF financial ETF is up +15%. The NASDAQ composite is up +16%, retail +14.8%, cyclicals +20%, oil services +24.5%, semiconductors +18%, transportation average +18.7%, the small cap Russell 2000 index is up +18.4%. This move has been fueled by emotions and short covering. Fund managers were stricken by fear of missing the move and fear of underperforming their rivals with less than a month to go before fiscal yearend on October 31st. Now stocks are very short-term overbought.

Technically the S&P 500 has rallied past resistance at 1200 and 1220. Yet there is still resistance at its late August, early September high at 1230. If it can rally past 1230 then we've got a good chance of moving to 1250. On the other hand if the rally stalls at 1230 then we could see a correction back to the 1180-1170 zone (see the intraday chart).

Intraday chart of the S&P 500 index:

Weekly chart of the S&P 500 index:

The move in the NASDAQ composite has been huge! The breakout past 2600 and its exponential 200-dma and simple 100-dma is certainly bullish. Yet the move is so sharp the index looks very over-extended. The next level of overhead resistance is probably the 200-dma or the 2700 level. On a dip I would expect the 2600 level to offer support (that's -2.5% from here).

Daily chart of the NASDAQ Composite index:

The rebound in the small cap Russell 2000 index has been equally impressive. Yet it's not quite challenging its September highs yet. If the market does see a correction then the $RUT could decline back toward its 50-dma or the 675 area. The next level of overhead resistance looks like the September 16th high near 718 and the August 31st high near 737.

Daily chart of the Russell 2000 index

Looking ahead at the economic data this week and we have a busy schedule. Reports to watch are the NY Empire index, the PPI and CPI reports, the Fed's Beige Book, and the Philly Fed survey. On top of these economic releases the Q3 earnings season will hit full swing. Many of the big hitters in the banking sector and several major tech companies are reporting. This week is going to set the tone for earnings season.

- Monday, October 17 -
NY Empire manufacturing for October
Industrial production

- Tuesday, October 18 -
PPI reading for September

- Wednesday, October 19 -
CPI reading for September
Housing starts for September
Federal Reserve Beige Book

- Thursday, October 20 -
Weekly Initial Jobless Claims
Existing home sales for September
Philly Fed survey

The recent crop of better than expected economic data, not counting the consumer sentiment numbers, is bullish for the market. Fears that the U.S. was sliding into a recession seem to be receding. Positive corporate earnings and guidance could go a long way in supporting this hope. I will point out that the ECRI leading indicators continue to fall and point toward recession. Plus the U.S. bond market has been able to predict every recession we've ever had since 1970. Currently the bond market is suggesting odds of a recession are at 60% (within the next twelve months).

This week the market will be digesting corporate results while keeping both eyes focused on Europe. In the shadow of Europe's crisis with Greece there seem to be looming challenges for China. We've talked about this before with the on again/off again concerns over a hard landing in China. This past week saw consumer price inflation in China rise to 6.1%. The Chinese government has been trying to keep inflation down near 4%. Analyst have been concerned for the last several months that China's attempts to slow down their economy might go too far and fuel a global economic slowdown. It does seem that the globe is slowing down. Chinese exports fell to their slowest pace in seven months but this could be a reflection of the slowdown in Europe, which is China's biggest trading partner.

Overall I think there is a good chance we may have seen the lows for the year in stocks but that is going to depend on the EU's success with how they craft a default in Greece. There will be a default. The question is what shape will it take.

- James