Earnings disappointments continue to plague the stock market. Yet it seems like the sell-off is slowing down. Much of last week's losses came with the Tuesday morning plunge where the S&P 500 and the NASDAQ broke some key support levels. Investors seem to be in a wait and see mode. Stocks, bonds, commodities, and the U.S. dollar have been churning sideways the last couple of days. I warned readers last week that the market would probably be "flat to down" with traders likely stuck in neutral.

Headlines from Europe were mixed. Spain's latest reading on unemployment grew from 24.6% to 25%. It is double that for young Spaniards. The Eurozone's most recent reading on its manufacturing activity and service activity fell to their weakest levels since June 2009. In positive news it looks like the summer Olympics boosted the U.K.'s economy with their Q3 GDP coming in positive at +1%. That was ahead of expectations and officially ends the U.K. recession. Across the channel, Germany saw its latest consumer confidence survey rise to its highest level in five years. Coincidentally the U.S. consumer sentiment is at five-year highs as well.

Economic data in the U.S. this past week was generally benign. No one expected any fireworks from the two-day FOMC meeting and none were seen. The Fed said economic activity continues to grow at a "moderate pace" and that the Federal Reserve would continues its current activity including Operation Twist (buying long-term, selling short-term U.S. bonds) and buying $40 billion a month in mortgage-backed securities. In spite of the Fed's activities the interest rate on a fixed 30-year mortgage rose to 3.5%. That is a four-week high. Of course in perspective a 3.5% rate is exceptionally low. Yet these once in a lifetime mortgage rates are not fueling applications. The MBA mortgage index saw applications for new mortgages fall -12.0% last week.

New home sales for September came in at an annualized rate of 389,000. That was above the August rate of 368,000 and better than expected. This is the highest level since April 2010. While inventory of new homes fell to a 4.5 month supply, which happens to be a seven-year low. Meanwhile pending home sales in September only rose +0.3%, which was a lot less than the +2.5% economists were expecting.

It was somewhat surprising to see how stocks did not react to positive headlines regarding the U.S. GDP estimate. Economists were expecting an improvement from +1.3% growth in the second quarter to +1.7% in the third. Yet strong improvement in consumer spending and a big uptick in the housing industry helped push the Q3 GDP growth to +2.0%.

Elsewhere the durable goods data surged +9.9%, which was better than the +8.0% estimate. This follows a -13.1% drop the prior month. The University of Michigan consumer sentiment index ticked down from 83.1 to a final reading of 82.6 for October. The weekly initial jobless claims came in just below expectations at 369,000.

Right now the problem with stocks is corporate earnings. The trend of disappointing earnings results and cautious guidance continues. Apple Inc. (AAPL) was the high-profile disappointment this week with earnings coming in at $8.67 a share. That missed Wall Street's estimate and AAPL management lowered their guidance going forward. Amazon.com (AMZN) was another high-profile report where management lowered their Q4 guidance.

The challenge seems to be sales. Corporations are missing revenue estimates. According to FactSet research the historical norm is for 55% of companies to beat analysts revenue estimates. Currently this Q3 season only 36% have beaten the revenue estimate. Making matters worse has been a parade of companies that are lowering their Q4 guidance. Normally Q4 is a strong quarter for businesses and lowered guidance could be making investors nervous.

Major Indices:

It was not a good week for the S&P 500. The index lost -1.5% for the week and broke down through potential support at the 50-dma, the 1430 level and the 1420 level. After the Tuesday morning breakdown the index has been hovering inside the 1400-1420 zone. We've been talking about the 1400 level as significant support for a while now. Given the recent sideways consolidation over the last couple of days it's giving hope that the 1400 level might hold as support. The bears would point out that even with the short-term consolidation the S&P 500 still has a bearish trend of lower highs and lower lows.

I wouldn't be too exact here. We should probably use the 1400-1395 area as the support area to watch. Currently the rising 100-dma near 1395 should offer some additional support. If I had to guess what might happen I would look for a dip to 1395 and then a quick bounce. The real question is whether or not there is any follow through higher on the bounce.

If the 1400 (1395) level breaks then the S&P 500 will probably drop toward 1380 or the simple 200-dma (currently 1377).

chart of the S&P 500 index:

Weekly chart of the S&P 500 index:

The correction lower in the NASDAQ composite continues. The NASDAQ is down five out of the last six weeks. This past week saw a breakdown under psychological, round-number support at the 3000 level. The index did find some short-term support at the simple 200-dma but it looks like this support might break soon. Even as the selling has slowed down the NASDAQ still has a bearish trend of lower highs and lower lows. High profile earnings disappointments and lowered guidance from companies like AAPL and AMZN don't help this tech-heavy index.

You could definitely argue the NASDAQ is short-term oversold and due for a bounce but I would expect the 3050 area to act as new resistance. If this sell-off continues then the next levels of support to watch are 2950 with the 200-ema, the 2900 level, and the 2850 area.

chart of the NASDAQ Composite index:

Weekly chart of the NASDAQ Composite index:

The small cap Russell 2000 index looks a lot like the NASDAQ composite. This past week saw a breakdown under key support with the $RUT breaking through the 820 level. Traders did buy the dip near its 100-dma and a long-term trend line dating back to the October 2011 low (see chart). Yet now the 820 level is acting as new short-term resistance. If this sell-off continues then the $RUT might see a bounce near the 800 mark. Otherwise it's probably headed for 780 or lower. Should the $RUT bounce from current levels then it will probably find resistance at the new six-week trend of lower highs.

Daily chart of the Russell 2000 index

We have past the high-point for Q3 earnings season. The tone has been set and it's one of disappointment. We still have a couple of busy weeks to go with hundreds of companies yet to report but investor focus will likely turn elsewhere. The October jobs report looms large on the calendar since the jobs number and the unemployment rate could potentially influence the U.S. presidential election. I think that is unlikely since most voters have already made up their minds. Economists are expecting the U.S. to show +120,000 new jobs in October. The unemployment rate is expected to stay at 7.8%.

Economic and Event Calendar

- Monday, October 29 -
personal income and spending data

- Tuesday, October 30 -
Case-Shiller 20-city home price index
Consumer Confidence (for October)

- Wednesday, October 31 -
ADP Employment change report
Chicago PMI report
Chinese manufacturing PMI data

- Thursday, November 01 -
Weekly Initial Jobless Claims
ISM Index (for October)
construction spending
auto and truck sales for October

- Friday, November 02 -
Nonfarm payrolls (jobs) report for October
unemployment rate
factory orders
Eurozone PMI data

Additional Events to be aware of:

Nov. 3rd - G-20 Finance minister meeting
Nov. 6th - U.S. Presidential Election

The Week Ahead:

As we look at the week ahead a good question to ask is what will drive stocks up or down? The end of October is the fiscal year end for many mutual funds. Thus window dressing could move stocks over the next three days especially if the market starts to bounce. Unfortunately, that is a sword that cuts both ways. If the market's major indices continue to breakdown then fund managers might feel the need to sell to lock in gains.

Here in the U.S. with less than two weeks to go the presidential election will likely consume the media's focus (as if it hasn't already). I'm sure most of us are pretty tired of all the political ads but this is the sprint to the finish line for politicians. At this point I don't see how this moves the market unless there is some new bombshell that rocks one of the presidential candidates' campaigns.

Technically you could argue stocks are oversold and could bounce from support. After what has essentially been a six-week correction, traders could be looking for a bounce. Thus, an additional breakdown from here could spark a serious sell-off as traders panic. While I would not be surprised to see a bounce I suspect there is a good chance the market merely churns sideways up until the election.

I would keep an eye on the U.S. dollar. The currency looks like it could bounce after forming what might be a bullish double bottom over the last few weeks. A rise in the dollar would be bearish for commodities.

James