Expectations for a deal in Washington to end the government shutdown and extend the debt limit continued to fuel big gains in the stock market. After a 16-day shutdown a last-minute deal was announced and the market accelerated higher. President Obama signed a bill passed by both the Senate and the House of Representatives that funds the U.S. government through January 15th, 2014 and raises the debt ceiling limit through February 7th, 2014. The stock market didn't care that our elected officials only kicked the can down the road. We might have to endure this entire ordeal over again in early 2014. The S&P 500 has risen seven out of the last eight trading days. By Friday's closing bell the S&P 500 and the small cap Russell 2000 closed at new all-time, record highs.

Economic Data

In the U.S. our economic data was mixed and really didn't matter. Everything took a back seat to the drama in Washington D.C. The National Association of Home Builders said their Housing Market Index for October fell from 58 to 55. The MBA mortgage index inched up +0.3% but the refi component rose +3.3%, up five weeks in a row. The Federal Reserve's Beige Book was a non-event with the same modest to moderate growth across the twelve districts. The Fed did publish two of their regional surveys. The Philadelphia Fed survey fell from 22.3 in September to 19.8 in October. Meanwhile the New York Empire State fed survey dropped from 6.29 in September to 1.5 in October.

Overseas Data

China released a lot of data last week. There is rising concern over the rate of inflation in China. Their CPI rose +0.8% month over month and year over year inflation hit +3.1%. Both readings were higher than expected. Retail sales in China were relatively in-line with estimates at 13.3%. Industrial production came in at +10.2%. There was also concern over China's exports, which declined for the first time in three months. China's trade surplus plunged from $28.6 billion to $15.2 billion. Overall China said their GDP grew at +2.2% for the quarter and hit a yearly pace of +7.8%, which was above the prior reading of +7.5%.

The only significant economic news out of Japan was their industrial production, which contracted -0.9%, which was worse than expected. Yet that didn't stop the Japanese NIKKEI index from climbing seven days in a row. Meanwhile economic data in Europe was mostly positive. Germany's ZEW economic sentiment poll rose from 49.6 to 52.8. The Eurozone ZEW poll slipped from 59.4 to 59.1. Eurozone industrial production rose +1.0%, up from a -1.0% reading the prior month. The major European stock markets rallied seven days in a row.

Major Indices:

The movement in the S&P 500 index has been dramatic. The large cap index is up almost 100 points from its October 9th low, just eight trading days ago. That's worth a +5.9% bounce and the index closed the week up +2.4% and at a new all-time record high. Year to date the S&P 500 is up +22.3%.

On a short-term basis you could easily argue that the S&P 500 is overbought but that doesn't guarantee a pullback any time soon. The 1750 level could be round-number resistance. Beyond that level the 1770 and 1800 levels are good spots to look for resistance.

If the market sees some profit taking then 1730, 1700 and 1680 could all act as possible support.

chart of the S&P 500 index:

Weekly chart of the S&P 500 index:

The NASDAQ composite delivered an outstanding week with a +3.2% gain and new 13-year highs. The index is up almost 250 points or +7.2% from its mid October low. It is definitely short-term overbought and we should not be surprised to see a pullback. Year to date the NASDAQ is up +29.6%.

The 3900 level should have been resistance but the NASDAQ closed above it on Friday. 3950 and 4,000 are likely overhead resistance levels. If the NASDAQ can close over 3950 then the 4,000 mark will act like a magnet. The recent highs near 3815 and the 3800 level should be short-term support. Below that the 3700 level should be support.

chart of the NASDAQ Composite index:

The small cap Russell 2000 index is also racing higher. This index added +2.8% and has produced a 76-point bounce off its October low worth a +7.3% gain. This is a new all-time high for the $RUT. As you can see from my charts below the $RUT is nearing potential resistance at its trend line of higher highs (in this case the top of its bullish channel).

I would expect resistance somewhere in the 1120-1140 zone. Look for support at 1085-1080 or 1060 if we see a sharp correction. Year to date the Russell 2000 is up +31.3%.

chart of the Russell 2000 index

Weekly chart of the Russell 2000 index



Economic Data & Event Calendar

Now that the government is back up and running we will start to receive all the delayed reports. First and foremost will be the non-farm payrolls (jobs) report for September, which will be release on Tuesday morning, October 22nd. Economists are expecting 160,000 new jobs, down from 169,000 in August. Everything else on the calendar will likely be overshadowed by Q3 earnings reports of which there will be dozens. I would keep an eye on HSBC's China manufacturing PMI data, which tends to vary from the official Chinese PMI data.

NOTE: You can view a calendar of earnings reports by clicking here.

Economic and Event Calendar

- Monday, October 21 -
existing home sales data

- Tuesday, October 22 -
non-farm payrolls (jobs) report for September.
Unemployment rate for September

- Wednesday, October 23 -
MBA mortgage index (weekly data)
China's HSBC manufacturing PMI data

- Thursday, October 24 -
Weekly Initial Jobless Claims
Eurozone PMI data
new home sales data

- Friday, October 25 -
durable goods orders
University of Michigan consumer sentiment (final reading for October)
G7 meeting begins

Additional Events to be aware of:

Oct. 29-30th: next (two-day) FOMC meeting




The Week Ahead:

Now that the government shutdown is over and the debt ceiling fight has been rescheduled for February 2014 we will see Wall Street's attention turn back to Q3 earnings season. Thus far earnings season has been pretty good. Almost 100 of the S&P 500 components have reported their Q3 earnings and almost 61% have beat analysts' estimates. In comparison 66.5% beat bottom line estimates in the second quarter. Unfortunately, only 38% of those 100 companies have beat the top line revenue estimate, compared to 45% in the second quarter.

There are concerns that we could be at an earnings peak. Profit growth has been slowing. Currently Wall Street's forecast for the fourth quarter and 2014 remain very optimistic. If corporate guidance is too soft this season it could sour the rally. We could certainly see corporate America try to lower expectations and blame it on the government shutdown.

Speaking of the government shutdown we could actually see it happen all over again in January 2014. Economists are already trying to figure out how much the 16-day shutdown hurt the U.S. economy. Our economy was already inching along in the +2% growth area. The shutdown could shave off -0.2% to -0.5% from the GDP. Fortunately for bullish investors the market seems to have a short memory. Eventually the U.S. debt is going to hit some unforeseen wall where creditors finally stop and notice. The U.S. debt has exceeded $17 trillion. The U.S. GDP is only $15.68 trillion. Check out some of these numbers on the U.S. Debt Clock website. The Fitch credit rating agency put the U.S. credit rating on negative watch for a potential downgrade. The Chinese Dagong rating agency downgraded U.S. debt from "A" to "A-" last week and reaffirmed their negative outlook.

The path of least resistance for stocks is up. The already weak economy combined with the shutdown should almost guarantee that the Federal Reserve will not taper their QE program until 2014. Since Janet Yellen will likely succeed Bernanke as Federal Reserve Chairman that adds an extra level of comfort for a stock market that is addicted to QE stimulus.

I will mention that October 31st is traditionally year end for many mutual funds. Most funds are drastically underperforming the market, a market that has been exceptionally bullish this year. Will fund managers be tempted to sell into this strength to lock in gains or will they try and squeeze out a few more percentage points and chase stocks higher before November 1st?

Unless we see some extremely negative jobs numbers or a sudden turn lower in Q3 earnings results then odds are we can count on the trend higher. There will be pullbacks along the way but each dip will probably be shallower than you might expect. I would prefer to buy stocks on a dip if we can get one.

James