The best six months of the year is off to a decent start for the big cap indices. The markets digested a lot of big events like the U.S. midterm elections, the ECB meeting, and a jobs report miss. The S&P 500 and the Dow Industrials both hit new record highs. Financials and transportation stocks were showing relative strength while semiconductor and biotech stocks saw some profit taking. The small caps and the NASDAQ seemed to struggle but overall it was more of a sideways, consolidation week following the big gains in the second half of October.

The U.S. dollar continues to rally and the dollar index is at four-year highs, which is weighing on commodities. The dollar is at seven-year highs against the Japanese yen. Crude oil lost -2.7% and broke down under support near $80 to end the week at $78.43 a barrel. Brent crude settled at $83.60. Silver was off -1.8% at $15.81 an ounce. Gold managed a bounce of +0.5% and closed near $1,179 an ounce. The bond market bounced on Friday and the yield on the U.S. 10-year note dipped to 2.3%.

Economic Data

Economic data in the United States was mixed last week. The ISM manufacturing data rose from 56.6 to 59, which was better than expected. ISM services declined from 58.6 to 57.1 The Markit PMI number fell to multi-month lows at 55.9 versus estimates for 56.2. Yet all of these numbers are above the neutral line of 50.0 so they still signal economic growth.

The U.S. midterm election is not a pure economic event but it will influence future policy. The Republicans gained seven seats in the Senate, giving them a 52-seat majority. They also added ten more seats in the House of Representatives. It's assumed that a Republican led House and Senate will be more business friendly but they still face challenges from the Democrats who can filibuster in the Senate and President Obama who can veto any bill.

The jobs data last week was generally encouraging. The ADP employment change report said the U.S. added +230,000 private sector jobs in October, which is up from 225K in September. That set up bullish expectations for the nonfarm payroll (jobs) report on Friday. Economists were expecting +235,000 new jobs in October. The BLS nonfarm payroll report only showed +214,000. Normally a jobs miss of 20K would spark some selling pressure and stocks initially dipped on this report, especially since there were some whisper numbers in the 250K-to-300K range. Fortunately, there was no follow through on the initial market sell-off.

The August jobs report was revised higher (again) from +180,000 to +203,000, which is significant improvement from the original headline of +142,000 in August. The September report was revised higher from +248K to +256K. These revisions mean the U.S. has now added more than +200,000 jobs in the last nine months in a row. Reuters noted that we have not seen a streak that strong since a 19-month streak back in the 1993-1995 time frame. It is also the 49th consecutive month of job gains. That's a feat the country has not seen since the 1930s.

The U.S. unemployment rate fell from 5.9% to 5.8%. Meanwhile the labor force participation rate inched higher from a multi-decade low of 62.7% to 62.8%. The broader U6 unemployment rate improved from 11.8% to 11.5%, which is encouraging. Another improvement was the average workweek, which eked out a gain from 34.5 to 34.6 hours. If this trend continues, a rising number of hours works tends to precede strong job gains.

While the headline number was a miss the overall report was seen as a goldilocks number that wasn't too hot or too cold. The markets seemed to interpret the jobs data to mean the Fed will not feel rushed to raise rates since job growth remains steady and not too strong.

Overseas Economic Data

Some of the economic data overseas did see some improvement but the headlines were all about the European Central Bank meeting. Before the ECB meeting there were reports of a mutiny among the ECB members with many unhappy with ECB President Mario Draghi's leadership. Reuters reported that 10 out of 24 ECB members are not in favor of a European QE program. Yet this instability did not come up in the meeting.

The ECB left rates unchanged at 0.05%. Draghi continued to tease the markets that QE is coming. He suggested that the central bank is poised to start asset-backed purchases soon. Of course we all know he's talked a big game without any real action for a long time. It was over two years ago that Draghi made his "whatever it takes" statement. The ECB President did say he expects the central bank's balance sheet to grow back toward March 2012 levels, which would mean a additional one trillion euros from current levels (near 3 trillion euros).

The market seemed hopeful that the ECB will follow through this time but there are skeptics. Ben Bernanke, former U.S. Fed chairman, was quoted by Bloomberg saying the ECB is going to have a hard time implementing any QE. The ECB does not have the same structure that the U.S. or Japan has and thus the European Central bank faces multiple challenges, some of them legal issues, to buy government debt.

Looking at the economic data last week the Eurozone said their retail sales dropped -1.3%, which was worse than expected. The European Commission lowered their GDP forecast for Europe. They now expect 2014 GDP growth to be +0.8% versus prior estimates of +1.2%. They also lowered their 2015 GDP growth forecast from +1.7% down to +1.1%.

Germany reported improving trade data with imports up +5.4% and exports up +5.5%, way above expectations. German industrial production rose +1.4%, which was below estimates but up from the prior month's -3.1% decline. France said its industrial production was unchanged. Spain saw its industrial production rise +1.0%, up from +0.3% the prior month. Spain was also making headlines with its Catalonia region voting on independence.

The vote is controversial. Catalonia, an area of Spain that includes Barcelona, has been indicating they want to leave Spain for quite some time. Spain's Prime Minister Mariano Rajoy and the nation's constitutional court have called the vote illegal. In an effort to soften the blow Spain's leaders have chosen to let the vote occur as a non-binding exercise. The prime minister is calling it a "freedom of expression" event.

Economic data in Asia's two power houses was mostly negative. China's manufacturing PMI data fell from 51.1 to 50.8. The country's HSBC services PMI dropped from 53.5 to 52.9 when analysts were expecting a rise. Japan's manufacturing PMI dropped from 52.8 to 52.4. Numbers above 50.0 still suggest economic growth. If you recall a week ago the market was reacting to Japan's surprise announcement of a massive QE program. The BoJ's Governor Kuroda said they have no pre-set time limit on this QE program and will keep it in place until they achieve their inflation target. It sounds like Japan's "whatever it takes" moment.




Major Indices:

The S&P 500 index added another +0.7% last week, setting new record highs. The index is now up 211 points or 11.5% from its October 15th low just 17 trading days ago. It is very short-term overbought and nearing resistance at its trend line of higher highs (see chart).

While I expect the index to see some profit taking odds are there are plenty of investors ready to buy the dip. The 2,000 level could be short-term support. Below that I would look toward the 50-dma near 1970 as potential support.

Year to date the S&P 500 is now up +9.9%.

chart of the S&P 500 index:

Weekly chart of the S&P 500 index

The NASDAQ spent last week digesting its recent gains in a sideways consolidation. This is potentially bullish. Bears could argue that momentum has stalled. Bulls can argue there was no profit taking after such a big bounce from its October lows. The NASDAQ managed to hold above new support at 4600 it remains near 14-year highs. Personally I think a pullback would be healthy. The 4500 area should be decent support.

If the NASDAQ does breakout then it will probably see resistance about every 50 points (4700, 4750, etc.). Year to date the NASDAQ is up +10.9%.

chart of the NASDAQ Composite index:

Intraday chart of the NASDAQ Composite index

The small cap Russell 2000 index was also consolidating sideways last week. Lack of profit taking after such a big bounce from its October low is somewhat encouraging. It would be healthier to see the $RUT pullback first before hitting new relative highs. The 200-dma near 1150 would be a great spot to look for a bounce from support.

The early September high near 1185 is potential resistance. Beyond that the 1200 level and the all-time highs near 1213 are overhead resistance. Currently the $RUT is only up +0.9% for the year.

chart of the Russell 2000 index

Weekly chart of the Russell 2000 index



Economic Data & Event Calendar

The week ahead is relatively quiet for economic reports. Earnings season is still going although it's almost over. A few of the big names reporting their QE results this week are Wal-Mart (WMT), Cisco Systems (CSCO), JC Penney (JCP), Macy's (M), and Applied Materials (AMAT).

Thus far the Q3 earnings season has been pretty good. Of the 446 S&P companies that have reported their results about 77% have beaten Wall Street's earnings estimates. 60% have beaten the revenue estimate, which is encouraging. We haven't seen an earnings season this good since Q2-2010 when 79% of the S&P 500 beat their earnings estimate. Analysts were only expecting earnings growth of +4.5% but right now, based on the companies that have reported thus far, Q3 earnings have been up +7.6%.

Economic and Event Calendar

- Monday, November 10 -
Japan's trade data

- Tuesday, November 11 -
(nothing significant)

- Wednesday, November 12 -
Wholesale inventory data
Japan industrial production

- Thursday, November 13 -
Weekly Initial Jobless Claims
Wal-mart (WMT) earnings report

- Friday, November 14 -
Retail sales data from October (U.S.)
University of Michigan Consumer Sentiment survey

Additional Events to be aware of:

November 24: Iran nuclear deadline
November 27: U.S. market closed for Thanksgiving
December 17: FOMC meeting

Looking Ahead:

Looking ahead there are always concerns that can undermine the market. Overall the expectations for this coming holiday shopping season is pretty good. Yet there are a few companies that have voiced some concerns. Kate Spade (KATE) and Starbucks (SBUX) are both worried that mall traffic has been low this year and they do not expect to see much improvement in mall traffic during the holiday shopping season versus last year.

Another potential concern is investor sentiment. Are we too bullish? The latest American Association of Individual Investors (AAII) weekly survey shows 52.69% of investors are bullish. This is the highest reading we've seen all year. Contrarians will point at this above average bullish sentiment as a warning sign.

Growth problems persist. Europe continues to struggle. There region has wasted the last few years hoping for a recovery. They have failed to make the necessary changes and now their economies are slipping. Europe is on the verge of their third recession in the last six years. The region is facing deflation pressures. We could easily see the credit/financial crisis return with struggling countries like Greece, Italy, and Spain.

Japan is also facing deflation pressure again but they have pulled out their monetary policy bazooka to force inflation. This is short-term bullish for the Japanese market but potentially fatal long-term. Meanwhile China is growing at its slowest pace in the last five years.

On the geopolitical front we are approaching a major deadline of November 24th in the Iran nuclear talks. According to Secretary of State John Kerry, there are significant holes in these discussions and time is running out.

Russia also remains an issue. The violence in Eastern Ukraine is no longer on the front page but the fighting continues. Hundreds of people have died since the "ceasefire" in September. This past week there were new reports that Russia just sent 32 tanks, 16 artillery, and dozens of trucks with military supplies into Ukraine to help the rebels. It doesn't sound like Putin has any intention of leaving Ukraine alone.

Another challenge is Russia's economy, which is quickly spiraling downward. The Russian ruble (rouble) is plunging. The currency is down -10% in the last 48 hours and down -30% for the year. These are astronomical moves in the currency market. The Russian central bank has spent $30 billion trying to support the ruble in October. This was not enough to stop the ruble's slide. This past week Russia announced they would stop supporting their currency, which sparked the sharp decline.

Putin's war on Ukraine has sparked a major flight of investor capital out of the country. The combination of U.S. and European sanctions has also hurt. Pouring salt in the wound has been the 25% drop in crude oil prices to four-year lows. Crude oil is a major export for Russia and one of its main cash cows to support their government. The big drop in crude oil really hurts. All of these factors combined have ignited a big jump in inflation inside Russia. There are fears brewing that Russia could see another currency crisis similar to the one it saw in the 1990s. Further ruble weakness could cause a lot of trouble for Russian President Putin, which might make him even more belligerent.

The previous eight paragraphs were all about potential worry spots for the market and the world. Now we get to reasons why U.S. stocks should continue to climb.

The U.S. economy is growing at +3.5%, making it a bright spot among the major economies. Interest rates are still near record lows. Mortgage rates are still near record lows, which should support the residential real estate market. The U.S. Federal Reserve has kept the "considerable period" language in their statement suggesting the next interest rate hike is still a ways off. Officially QE3 is over but the Fed is still buying treasuries to replace the bonds that mature. You could call it stealth QE.

The strong dollar has pushed crude oil to four year lows. This has brought the price of gasoline to less than $3.00 a gallon. Gas now cost less than milk. This provides an extra $260 million a week to the U.S. consumer to spend on something else besides filling up their car. That's good news for retailers. The National Retail Federation expects holiday shopping to rise +4.1% this year versus +3.1% a year ago and above the 2.9% average. Forrester Research is estimating that online shopping will rise +13% this year to a record $89 billion.

The U.S. job market continues to slowly improvement. Bears will argue that the jobs we are adding are low-paying jobs, which is mostly true, but overall the trend is positive. It is the strongest job market we have seen in years, which impacts consumer sentiment. Speaking of consumer sentiment, the most recent surveys have put sentiment and consumer confidence at multi-year highs, which is bullish for the U.S. economy, which is 70% consumer spending.

The U.S. Federal Reserve has ended their QE program but Japan has picked up the baton and launched a massive new QE program that includes spending hundreds of billions of dollars on foreign equities, most of which will be in American companies. Now the ECB is hinting at asset-backed purchases, which could be announced next month.

Seasonally this is a strong period for stocks. November is the third best month of the year for stocks. Midterm election Novembers do even better with an average gain of +2.5%. We are also in the best six months of the year (November 1st - April 30th), which averages a +7.1% gain for the S&P 500. Yet midterm years are usually stronger and the performance for the best six months of the year is normally about +16%.

If you like those numbers then 2015 should be even better. Students of the presidential election cycle on the stock market have noted that 2015 is a pre-presidential election year. These tend to be the strongest of the four-year cycle. Number crunchers also argue that history says years that end in 5 (e.g. 2015) are also bullish for the stock market.

You don't have to believe all of these statistics to be bullish on the market. I'm just highlighting that the list of factors put the odds in favor of the bulls for the next few months. However, please note that these are big-picture issues. The U.S. market remains short-term overbought. We can alleviate this overbought condition with a pullback or the market can consolidate sideways for a while.

Believe it or not but we only have about 36 trading days left until 2015.

James


"We don’t beat the Reaper by living longer. We beat the Reaper by living well."
-Randy Pausch (1960-2008), The Last Lecture