October 2015 is in the books and it was a winner for investors. Q3 earnings expectations were extremely low and thus far results have been much better than expected. Combine that with dovish comments from central banks and new rate cuts overseas and there was plenty of fuel to drive stocks higher in October. The big cap U.S. indices, the S&P 500 and the NASDAQ composite, both posted their fifth weekly gain in a row.

Money was flowing out of bonds and precious metals and into stocks. Crude oil had a good week (+3.9%) but the rally was not due to fundamentals. U.S. oil inventories actually rose +3.4 million barrels. The rally seems to be a rising geopolitical risk premium. Energy stocks underperformed last week (-0.5%) but they were still up +11% for the month of October.

October Results

Looking at the daily charts of the major U.S. indices (see below) the rally looks a little extreme. The U.S. market delivered its best one-month gains since October 2011. How good was it? According to CNBC the Dow Jones Industrial Average saw its biggest one-month point gain ever, up +1,379 points. That was enough for a +8.5% gain. The S&P 500 rallied +8.3% while the NASDAQ composite surged +9.4% in October.

It wasn't just U.S. stocks. Global markets were in rally mode. The German DAX soared +12.3% and the French CAC rallied +9.6%. That was their best month since April 2009. The British FTSE 100 only gained +5% but that was its best one-month rally since mid 2013. Asian stocks rallied as well. The Japanese NIKKEI climbed +9.75% and the Chinese Shanghai composite snapped a four-month losing streak to gain +10.8%. (read more about it here.)

This widespread rally in stocks finally fueled a surge in bullish investor sentiment. According to the American Association of Individual Investors (AAII), bullish sentiment has been stuck under its long-term average of 38.7% for 33 weeks. That changed last week with bullish sentiment rising +5.6% to 40.4%. Neutral sentiment dropped -2.2% to 39.0%. Bearish sentiment fell for the fourth week in a row to 20.6% (-3.4%). (AAII Survey link.)

Economic Data

The Commerce Department said U.S. durable goods orders fell -1.2% in September. The August reading was revised lower from -2.3% to -3.0%. The drop was fueled by weak transportation orders. If you exclude the volatile transportation number then durable goods orders only fell -0.4%. Unfortunately the August reading, ex-transportation, was also revised lower from +0.2% to -0.9%.

The durable goods numbers do not bode well for U.S. economic growth but it was countered by a better than expected Chicago PMI. This report improved from negative territory (under 50.0) at 48.7 in September up to 56.2 in October. It is the best reading since January this year.

Last week's data from the housing market was disappointing. Buyers seem to be hesitating with prices rising so fast. The Case-Shiller 20-city home price index rose +5.1% in August. Meanwhile new home sales slowed. The annualized rate from August was revised lower from 552,000 a year to 529,000. This worsened in September with a drop to 468,000 units. Pending home sales dropped -2.3% in September.

FOMC meeting

One of the biggest economic events for the week was the FOMC meeting. As expected the Fed did not change policy. However, they did remove a significant sentence from their statement. The Fed deleted their line that suggested the fed was worried how global economic weakness was slowing U.S. growth. They fed statement essentially said that as long as U.S. economic data doesn't worsen in the next six weeks that they would raise rates in December. Stocks initially plunged on this news but quickly rebounded on Wednesday afternoon.

The U.S. Federal Reserve has kept their benchmark overnight interest rate near zero since December 2008. They can't lower it any further. Many market pundits believe the Fed feels forced to raise rates this year to maintain their credibility and December is the last scheduled meeting. Plus the Fed would like to have some ammunition to lower rates again if economic growth slows down too much. According to Jay Morelock, an economist at FTN Financial, "It will be difficult for the Fed to justify a rate hike at a time when income, consumption, and inflation are trending lower, leaving a December rate hike less likely than prior to the data."

Inflation is not going to suddenly accelerate in the next six weeks. That means the Fed is probably focused on the labor market. If the October jobs report (just a few days away) and the November jobs report both come in above +200,000 jobs then that might be enough for the Fed to raise rates in December.

The Fed funds futures, where investors put real money on the line, has seen the odds of a rate hike in December surge from just 6% a month ago to 47% chance today. This seems to contradict Morelock's opinion, which is a common one among economists.

Q3 GDP

Q1 2015 GDP growth was a disappointing +0.64%. Inventories surged in Q2 and the Q2 GDP estimate came in at +3.92%. Last quarter saw inventory numbers decline and the Q3 estimate fell to +1.5%. That was relatively in-line with Wall Street estimates. The Atlanta Fed's GDPnow estimate was expecting +0.9% growth.

A lot of economists looked past the headline number (+1.5% growth) and pointed to the real final sales component, which rose +3.0% last quarter. Current estimates for the fourth quarter are now in the +2.5% region.

Consumer Sentiment

Consumer spending accounts for about 70% of the U.S. economy. That's why economists try to follow consumer attitudes and spending patterns. The latest personal income and spending numbers were disappointing. September's read only showed a +0.1% rise in income and spending versus a +0.4% rise for both in August. Meanwhile the Conference Board's Consumer Confidence index fell from 102.6 to 97.6 in October. The University of Michigan Consumer Sentiment Index was revised lower from a preliminary estimate of 92.1 to 90.0 in October. This is the second lowest reading since November 2014.

Overseas Economic Data

There were a number of data points from Japan last week. The country's retail sales for September fell -0.2% from a year ago, which was significantly worse than expectations and down from +0.8% in August. Their industrial production came in better than expected with a rise from -1.2% in August to +1.0% in September.

Japan said their household spending plunged -1.3% last month. That's down from +2.5% the prior month. Inflation remains stagnant with the Japanese national CPI coming in at 0.0% in September.

There was a lot of expectation that the Bank of Japan would boost their stimulus when the central bank met on Friday. That did not happen. The BoJ lowered their forecast for both growth and inflation but they left interest rates unchanged at 0.10%. They made no changes to their massive QE program.

There was not much data out of Europe last week. Germany said their retail sales for September were flat (0.0%) month over month but up +3.4% from a year ago. Meanwhile the Eurozone reported their CPI for October was flat (+0.0%) from a year ago. Their core CPI was up +1.0%. Unemployment in the Eurozone improved from 10.9% to 10.8%.




Major Indices:

The S&P 500 has soared +10.5% from its late September closing low. Last week the big cap index only gained +0.2%. That was enough for its fifth weekly gain in a row. Year to date the S&P 500 is now up +1%.

If you look at the daily chart there appears an interesting pattern. The S&P's rally was broken up by five pullbacks or dips that lasted one to two days each. This trend won't last very long but if it continues the S&P 500 should rally on Monday.

Technically the 2,100 level is likely round-number resistance. The index should see short-term support near 2,060 (bolstered by its simple 200-dma) and the 2,040 and 2,020 levels.

Believe it or not but the S&P 500 is only 50 points away from a new all-time closing high (that's about 2.4%).

Daily chart of the S&P 500 index:

Better than expected earnings among some high-profile technology companies has really helped propel the NASDAQ higher. Last week the index added another +0.44%. It's up +6.7% year to date.

You can see on the daily chart that 5,100 is short-term resistance. Beyond that the all-time highs from July near 5,200-5,230 is the next resistance level. The 5,000 mark is round-number support. Below that the 4,900 level should also be decent support.

chart of the NASDAQ Composite index:

The small cap Russell 2000 index has underperformed its large-cap peers. The $RUT has spent a good chunk of October just consolidating sideways. The bullish breakout past short-term resistance on Wednesday last week has already reversed.

For the week the $RUT fell -0.36%. That pushed its 2015 performance to -3.5%. There is short-term support near 1,140. If 1,140 breaks we could see the $RUT drop toward 1,100. Meanwhile there is very short-term resistance at both 1,170 and 1,180. I also expect resistance in the 1,200-1,220 region. There is some good news. Small caps usually tend to outperform the broader market in December and January.

chart of the Russell 2000 index



Economic Data & Event Calendar

It's a brand new month and that means lots of economic data. U.S. auto sales could hit a record in October. Meanwhile the U.S. ISM manufacturing index could slip into contraction territory (under 50.0). The ISM services is expected to dip to its lowest reading in four months.

The four week moving average on the weekly initial jobless claims fell below 260,000 for the first time since 1973 last week. That should be bullish for the labor market. However, analysts expect the ADP report to show a decline in job growth. On Friday we'll see the nonfarm payroll (jobs) number. Economists are anticipating +180,000 new jobs, up from +142,000 the prior month. If the October number is near 180K it would be the third month in a row below the 200,000 mark.

There are several Federal Reserve officials speaking this week. Federal Reserve Chairman Janet Yellen is one of them. She speaks before the U.S. House Financial Services Committee on Wednesday. The stock market will be sensitive to anything she has to say.

- Monday, November 02 -
Eurozone manufacturing PMI
ISM index
Construction spending

- Tuesday, November 03 -
Factory Orders
Auto and truck sales

- Wednesday, November 04 -
ADP Employment Change Report
ISM services
Federal Reserve Chairman Yellen testimony before the House

- Thursday, November 05 -
Bank of England interest rate decision

- Friday, November 06 -
Nonfarm payroll (jobs) report
Unemployment rate

Additional dates to be aware of:

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:

Looking ahead the peak of Q3 earnings season is behind us. Over 340 of the S&P 500 companies have reported. 76% have beaten Wall Street's very low estimates. Only 47% have beaten analysts' revenue estimates. Thus far Q3 earnings have fallen -2.2% from a year ago. That's a big improvement from prior estimates of -5.5%. We are still on track for an "earnings recession" with two consecutive quarters of earnings declines. Most of this weakness is in the energy sector. Currently analysts are forecasting a -2.4% drop in Q4 earnings. This week we will hear from another 105 S&P 500 companies plus dozens more not in the index.

If haven't heard yet November 1st kicks off the "best six months of the year" according to the research team at the Stock Trader's Almanac. This trend has been pretty consistent over the last several decades. Everyone who follows the "sell in May" strategy is supposed to jump back into the market now.

This bullish seasonal trend does not mean stocks are immune to declines. After a +10% surge off their September lows the market is short-term overbought and likely due for a pullback. The first few days of a new calendar month tend to be more bullish as fund managers put new money to work. Yet I would not be surprised to see stocks drift lower in the week ahead. Fortunately we can use the pullback as a new entry point for bullish positions.

There have been some disappointing research notes come out in the last few days regarding potential November and December market gains. Sam Stoval, at S&P Capital IQ, wrote a note about how the market has "stolen from Santa". Essentially he is concerned that the big gains in October have essentially stolen from any normal Santa Claus rally the market might see in December. According to Stoval, when October is up more than +7% then gains in November and December tend to be subdued. The S&P 500 rallied more than 8% in October.

Another research note, this time from Kimberly Greenberger of Morgan Stanley, suggested the Grinch could steal Christmas this year. Greenberger believes that holiday sales growth will slow down from +4.3% in 2014 to +2.4% this year. You can read the Bloomberg article here.

Personally I remain optimistic. Yes, the U.S. market is short-term overbought. However, investors both big and small will likely buy the dips. It's been a disappointing year if you own the S&P 500 and hopes for a Q4 rally remain strong. Betting against the U.S. consumer is normally a losing trade. I am suggesting patience. A stock market pullback in early November is probably an entry point.

~ James