The stock market has roared back out of correction territory thanks to dovish central banker comments and additional stimulus overseas. The bulls can thank last week's rally on comments from ECB President Mario Draghi and the People's Bank of China cutting rates again. A rash of better than expected earnings reports from some high-profile technology names certainly didn't hurt.

Thursday night was a winner in the earnings department. Amazon.com (AMZN), Alphabet (GOOGL), Microsoft (MSFT), and AthenaHealth (ATHN) all reported earnings that were significantly better than expected. This group exploded higher on Friday morning. AMZN rallied $54 on Friday morning to hit $619 a share before settling with a $35 gain. Shares of GOOGL soared $71.00 higher on Friday morning but eventually settled with a +$38 gain. MSFT hit 14-year highs with its +10% rally. Shares of ATHN hit new 18-month highs with a $35 surge. These results produced a gap higher for the NASDAQ, which surged +2.2% on Friday.

All of the major U.S. indices posted gains for the week although just barely for the small cap Russell 2000 index. The S&P 500 is now up +10% from its September 29th low. That's a pretty big move in just four weeks. Last week's rally was relatively widespread. The transportation average added +2.7% (although it's still down -9% for the year). The semiconductor SOX index sprinted higher with a +4.7% gain. Banks were up +3.1%. Biotech stocks were a notable laggard with a -0.69% loss for the week. Crude oil plunged -6.4% for the week and that weighed on energy stocks, which posted a -1.7% decline.

Central Bank Moves

The European Central Bank (ECB) met last week and left their interest policy unchanged at 0.05%. ECB President Mario Draghi held a press conference afterward. Evidently the ECB's 1.1 trillion euro QE program is not working. So naturally they want to do more of it. Inflation is still too low in the Eurozone. Draghi said the bank would "re-examine" their QE program at the December meeting and suggested they might raise the size of their QE program. The market certainly interpreted his comments to mean exactly that and the European stock markets surged on Thursday.

Draghi's comments also drove bond yields lower in Europe. Spanish and Italian two-year bond yields briefly turned negative. Frankly that's amazing. It was only a few years ago that the "market" was talking about how Spain and Italy could default and now their short-term yields are virtually zero (suggesting strong credit-worthiness). Germany's two-year yield is still negative and offering a -0.3% yield today. Draghi does face a challenge to increasing his QE program since the EU is running low on bonds for him to buy. There is speculation he might be forced to buy stocks as part of an expanded QE program.

China's central bank was making headlines last week. The Chinese economy has been slowing down for years. Last weekend they reported disappointing manufacturing data and depressing trade numbers. Chinese imports fell for the 11th month in a row. Wholesale inflation has been in deflation territory for three years. The country's GDP estimate came in at +6.9%. While that was above the 6.8% estimate it is the first reading below the official +7.0% target since the 2008-2009 financial crisis. Growth in China is quickly approaching 25-year lows.

The Chinese government is desperately trying to prop up their economy. They cut rates again on Friday morning. This was their sixth rate cut in less than a year. The People's Bank of China reduced their deposit rate by -0.25%. They also reduced their lending rate by -0.25% to 4.35%. The PBoC also slashed the reserve requirement ratio by 50 basis points for qualifying banks. Unfortunately, many analysts believe China will be forced to continue this trend of rate cuts as their economy continues to slow down.

Speaking of slow economies Japan is still struggling. After years and years of deflation the Bank of Japan is trying to generate inflation. Thus far their massive QE program and stimulus efforts are not working very well. The BoJ meets again this week. A recent Bloomberg survey showed that 42% of economists believe Japan will add more stimulus at this meeting. If they do we will likely get a press conference from BoJ Governor Haruhiko Kuroda.

Overseas Economic Data

Economic data overseas last week, aside from the central bank moves, was relatively limited. I already mentioned China's disappointing GDP estimate. The country also said their industrial production slowed down to +5.7%. Japan said their preliminary manufacturing PMI for October was 52.5, which was better than expected. Unfortunately Japan's trade numbers continue to disappoint. September saw Japanese exports rise +0.6%, which is a big drop from Augusts' +3.1%. Japanese imports plunged -11%, down sharply from the prior month's -3.1% drop. This is the ninth month in a row for falling imports.

In Europe the Eurozone's preliminary manufacturing PMI for October was 52.0. Germany said their early manufacturing PMI number was 51.6. Numbers above 50.0 suggest growth. Inflation numbers are still troubling with Germany's PPI falling -0.4% last month and down -2.1% year over year.

Economic Data

Looking at U.S. economic data we saw housing starts rise +6.5% in September to an annual rate of 1.207 million. That an improvement from Augusts' 1.13 million rate. Housing starts are rising toward eight-year highs. Elsewhere we saw existing home sales surge +4.7% in September to an annual rate of 5.55 million. That's up from the prior month's 5.3 million pace. These are also near eight-year highs. Another positive read was the NAHB homebuilder confidence index, which improved from 62 to 64, which is a 10-year high.

The employment picture is still improving. The weekly initial jobless claims were 259,000. These have been falling for months. The four-week moving average dropped to 263,250, which is the lowest level since 1973.




Major Indices:

The S&P 500 has been roaring back from its late September lows. The drop in late September bounced near its August lows and the move looked like a bullish double bottom pattern. Since then stocks have been in rally mode and the S&P 500 is up four weeks in a row and up +10% in less than a month. Last week's +2.1% gain actually pushed the index back into positive territory for 2015 (now up +0.8%).

Technically the S&P 500 index has broken through multiple layers of resistance. It pushed past its 100-dma, its 200-dma, past resistance at its trend line of lower highs, past resistance near its July lows and the 2,050 level. Yet now, after such a sharp rally, the S&P 500 looks short-term overbought.

Using a Fibonacci retracement tool the S&P 500 could have support near 2,030 and 2,000 should the market retreat. Of course you could argue the 2,050 level is round-number support while the 100-dma near 2,040 could also offer technical support. It is important to note that just because it's overbought does not mean it can't get more overbought. The 2,100 level and the prior highs near 2,130 are potential overhead resistance.

Daily chart of the S&P 500 index:

The NASDAQ composite was a big winner last week with a +2.9% gain. Most of that was Friday's +2.2% pop. This index is now up +6.25% for the year. It's also up more than 500 points and more than +11% from its September 29th close at 4,517.

The last several days have seen the NASDAQ slice through multiple layers of resistance (just like the S&P 500). Friday's rally is a breakout past the NASDAQ's 100-dma, 200-dma, and the 5,000 level. Odds are probably good the NASAQ will fill this gap, which means a dip back toward the 4,920 area eventually. If Apple (AAPL) disappoints with its earnings report this week that could be the catalyst that sparks some profit taking.

Look for the 4,900-4,925 area to be short-term support.

chart of the NASDAQ Composite index:

The small cap Russell 2000 index was a significant laggard. The S&P 500 and NASDAQ both rallied more than +2%. Yet the $RUT only gained +0.3% for the week. It's still down -3.2% for the year. This is somewhat normal. Big cap stocks tend to outperform this time of year. Small caps usually accelerate higher in December and January. Fortunately there is some good news. Technically the $RUT appears to be coiling for a bullish breakout higher. There is still plenty of overhead resistance but it could try and play catch up to its big cap peers.

chart of the Russell 2000 index



Economic Data & Event Calendar

The pace of economic data picks up this week although a lot of it is real estate related. The big events to watch are the FOMC meeting, the U.S. GDP estimate, and the Bank of Japan meeting.

The Federal Reserve is not expected to raise rates at this meeting so the focus will be on their statement.

U.S. Q1 GDP growth was +0.64%. The second quarter accelerated and Q2 growth was +3.9%. The country saw a slowdown in the third quarter. Economists are estimating +1.6% to +1.7% growth in Q3. Yet the Atlanta Fed is only forecasting +0.9% Q3 growth.

I'd also keep watch on the Republican debate. Weeks ago democrat presidential hopeful Hillary Clinton tweeted about drug costs and shocked the biotech stocks into a steep sell-off. It's possible one of the republican front runners might say something market moving.

FYI: most of Europe will set their clocks back one hour tonight for daylight savings time. Most Americans will set their clock backs on November 1st.

- Monday, October 26 -
New Home Sales

- Tuesday, October 27 -
Richmond Fed manufacturing survey
Durable Goods Orders
Case-Shiller 20-city home price index
Consumer Confidence
FOMC begins two-day meeting

- Wednesday, October 28 -
FOMC meeting (interest rate decision)
(no press conference)
U.S. House Republicans vote on a new Speaker
3rd U.S. Republican debate

- Thursday, October 29 -
Eurozone consumer confidence survey
U.S. Q3 GDP estimate
Pending home sales data

- Friday, October 30 -
Bank of Japan interest rate decision
Personal Income & Spending data for September
Employment Cost Index
Chicago PMI
University of Michigan Sentiment survey for October

Additional dates to be aware of:

Oct. 31st - Chinese manufacturing PMI data
Nov. 3rd-5th - U.S. debt ceiling deadline
Nov. 18th - $14 billion in U.S. social security payments due
Nov. 26th - Thanksgiving holiday (markets closed)
Dec. 16th - FOMC meeting, new forecast Dec. 16th - Fed Chairman Yellen's press conference
Dec. 24th - Christmas Eve (market closes early)
Dec. 25th - Christmas (market closed)

Looking Ahead:

As we look at the week ahead the market will be digesting a ton of earnings news. Last week we saw some huge moves in individual stocks driven by earnings results (both up and down). The fireworks continue this week and the schedule is packed. Over 150 S&P 500 index companies will report earnings. Some of the big names to watch include Twitter (TWTR), Exxon Mobil (XOM), and Apple Inc. (AAPL).

After all the worry and gnashing of teeth about how bad Q3 earnings would be the hit or miss rate so far have been almost normal. That is probably because Wall Street set the bar so low. Of the 172 S&P 500 companies that have already reported nearly 70% of them have beaten the earnings estimate. A normal quarter sees 72% of companies beat earnings estimates. The revenue results have been disappointing. Only 50% of companies have beat Wall Street's revenue estimates.

A few weeks ago analysts were forecasting at -5.5% drop in earnings. Thus far the average earnings growth has been -3.1%. We are still on track for the first back-to-back earnings decline since 2009.

The Next Few Days

We still have one more week of October. Bulls have momentum in their favor. While stocks look short-term overbought here they could levitate even higher as fund managers do their last minute window dressing. October 31st is the fiscal year end for many mutual fund and hedge funds.

Seasonally we are quickly approaching the best six months of the year. You've hear of "sell in May and go away" to avoid the worst six months of the year. Now that time period is almost over. November 1st launches the best six months. That does not mean we can just blindly buy stocks in November. Normal trends still apply and stocks will ebb and flow.

If stocks maintain their gains through the end of October I would expect some weakness in early November. However, it will probably be an opportunity for us to buy the dip.

~ James