The Dow Industrials and the S&P 500 closed at new multi-week highs on Friday. Is the stock market finally ignoring Europe? You and I could only wish that were true! Traders may be weary of the story in Europe but stocks produced a volatile week in reaction to the various EU headlines. Overall economic data in the U.S. was either benign or neutral. Corporate earnings have been better than expected. The stock market has weathered a number of potentially bearish headlines. At the end of the week the S&P 500 was up another +1.1% and breaking out past key resistance levels. The S&P's move off the October low is now up to +15.2%.

Two weeks ago stocks had seen very strong gains and we were poised for profit taking on Monday. Sure enough, stocks sank but there was no follow through on Tuesday. Looking back on the week there were a number of headlines that helped move the market. Business confidence surveys in Germany and France came in low. Moody's put France on credit watch negative. Currently France has a triple-A rating (the highest). While this unofficial downgrade isn't a big surprise given France's position to help back stop the EU's financial troubles it remains a negative. Moody's also downgraded Spain's credit rating two notices. This was in part a catch up move since both S&P and Fitch had already downgraded Spain. It also reinforced the issue that Greece isn't the only problem in Europe. If EU leaders don't find the right solution for their Greece problem it's going to make matters worse with Spain and Italy.

Another major headline was China's Q3 GDP came in at +9.1%. This was seen as bearish since economists had been expecting +9.3% growth. Worries over a slowdown in China have been plaguing the commodity markets since China is such a massive consumer of raw commodities. While on the topic of economic data most of the data for the U.S. was benign. The Producer Price Index (PPI) reading on inflation came in at +0.8% with the core PPI at +0.2%. The Consumer Price Index (CPI) reading for inflation was only +0.3% with the core CPI at +0.1%. The Fed's Beige Book sparked some afternoon profit taking on Wednesday but overall it was a nonevent. The Beige book said most of the 12 regions saw slow to modest growth last month. One of the most bullish reports for the week was the Philly Fed survey, which bounced back from -17.5 in September to +8.7 in October. Economists were only expecting a rebound to -8.8.

We are in the middle of Q3 earnings season. Generally speaking the results have been positive. Approximately 70% of the S&P 500 companies reporting thus far have beaten estimates. The two big exceptions last week were Apple Inc. (AAPL) and Goldman Sachs (GS). AAPL missed the earnings estimate for the first time in years. Wall Street analysts had grown too bullish on AAPL and raised their estimates beyond the company's guidance. Meanwhile GS reported a big loss and missed estimates by 68 cents a share. This was only the second quarterly loss in the last twelve years for GS. The surprise following GS' report was a rally in the stock price instead of a sell-off on the earnings miss.

Europe & Greece

Europe remains in the spotlight. EU leaders are holding a major summit on Sunday and on Wednesday next week. Friday the stock market rallied on news that EU leaders had postponed any decision on Greece and the banking system on Sunday's meeting. Art Cashin called it a "stay of execution" rally on Friday morning. There were a lot of traders who were short the market expecting negative headlines or lack of a deal from the EU summit on Sunday. The fact that Europe postponed this decision to give them more time sparked short covering. Bulls would argue that giving EU regulators more time increases the odds that they actually come to some sort of agreement, which was unlikely to occur by Sunday night.

On Friday afternoon the next big headline was money for Greece. EU leaders finally voted to approve the next installment of the rescue funds to Greece. I have to issue a correction. Previously I was reporting this as 8 billion euros but this "loan" to Greece is actually worth $8 billion dollars, which is only 5.8 billion euros. The great news is that this should postpone any Greek default into next year. Since we're talking about rescue funds we should mention the EFSF. One of the biggest headlines of the week was news that EU leaders want to increase the size of the EFSF to 2 trillion euros. At least that was the idea floated a few days ago. This headline alone probably helped buoy the stock market.

EU leaders have a significant challenge. They need to organize a default for Greece in such a way that it does not trigger the "hard" default rules, which would launch all the credit default swaps and ignite the bad debt bank contagion they have been trying so hard to avoid. The recent 21% Greek debt haircut will probably end up being raised to 50% or 60%. The next challenge is protecting the major European banks. This means the banks need to be recapitalized. This has been a major sticking point. Some countries want to keep the recapitalization in the 90-100 billion euro range. Others believe it needs to be in the 250-300 billion euro range (or more). Finally now that EU leaders have finally voted and approved the newly expanded 440 billion euro EFSF fund, they are talking about making it five times bigger (2 trillion euros).

Monday is going to be a lot more quiet than traders were expecting since there will not be any major decisions made at Sunday's meeting. This pushes all the excitement out to Thursday (Oct. 27th).

Major Indices:

Technically the market still looks bullish. The S&P 500 index has been building a short-term trend of higher lows and higher highs. The breakout over resistance in the 1225-1230 zone is another positive. Plus, the S&P 500 has broken out past technical resistance at the simple 100-dma and the exponential 200-dma. If this rally continues the S&P 500 will be testing resistance at its March lows near 1250 soon. If the index can rally past 1250 then we're looking at the simple 200-dma near 1275 as overhead resistance.

If stocks retreat I would look for short-term support at 1220 and 1200.

Intraday (60-min) chart of the S&P 500 index:

Daily chart of the S&P 500 index:

Weekly chart of the S&P 500 index:

The NASDAQ composite is holding up relatively well. Traders bought the dip Thursday midday and the NASDAQ was able to pare its losses. You could argue the NASDAQ is forming a bull-flag consolidation pattern. If the rally continues the next level of resistance would be the simple 200-dma and the 2700 level. If it is a bull-flag pattern then it would suggest an upside target near the NASDAQ's 52-week highs (2850-2900).

Daily chart of the NASDAQ Composite index:

Intraday chart of the NASDAQ Composite index:

The small cap Russell 2000 index has been underperforming the S&P 500 index. Looking at the intraday chart below you can see the $RUT has been stuck in a trading range for almost two weeks. The good news is that the $RUT is poised to breakout from this range soon. A breakout could portend a rally towards the 760-770 area.

Daily chart of the Russell 2000 index

Intraday chart of the Russell 2000 index

The economic calendar this week is relatively quiet. We'll see multiple reports on housing and residential real estate. The biggest reports are probably the sentiment numbers and the Q3 GDP estimate. Economists are expecting Q3 GDP to improve to +2.2% growth. This is another very full week for Q3 earnings and the market will digest hundreds of corporate reports. Yet all of this news will take a back seat to the drama in Europe.

- Tuesday, October 25 -
consumer confidence for October
Case-Shiller home price index

- Wednesday, October 26 -
Durable Goods Orders
New Home Sales

- Thursday, October 27 -
Weekly Initial Jobless Claims
Q3 GDP estimate

- Friday, October 28 -
Employment Cost index
(Final) Michigan Sentiment for October

We are still facing questions about the U.S. economy. Last week I mentioned that the bond market was forecasting a 60% chance of recession in the next 12 months. That hasn't changed. The ECRI leading indicators continue to slip and just posted their 11th weekly decline signaling another recession. What I find positive was that Beige book was neutral (instead of negative) and the Philly Fed saw a really big bounce into positive territory, which helps alleviate some of the recession worries.

Another significant change last week seemed to be improvement to investor sentiment. I read about several investors and portfolio managers putting cash to work in the equity market in spite of the market's overbought conditions. Naturally fund managers are afraid to miss the move higher and they are afraid to underperform their peers. This fear can still fuel the rally as they race for performance. We only have a few days left before October 31st marks the fiscal year end for a lot of mutual funds. Thus the last days of October should have a bullish bias. The only real worry would be talks breaking down in Europe.

In summary, the path of least resistance for the stock market seems to be up. If you study the chart of the S&P 500 it does not look like a market that is afraid to hold over the EU summit. This would suggest that investors are giving EU leaders the benefit of the doubt and traders are willing to wait for Wednesday's meeting - at least for now. If last week was any indication the market can change its mind pretty quickly. The $8 billion payment to Greece should put a Greek default on the backburner for a few weeks. Seasonally we're in a bullish time of year. The mutual fund fiscal year end on October 31st should be a positive catalyst.

- James