If October turns out to be as good for the markets as September, we will be thrilled. The normally terrible September turned in nice gains all around with the Dow up 4.7%, S&P +3.8%, Nasdaq 5.7% and Russell 2000 5.4%. September has not posted gains since 2013. This was the least volatile September ever and that goes back over 115 years.
Obviously, a main driver of the low volatility was kicking the budget debate and debt ceiling crisis down the road into December. That removed all the political worries about government shutdowns left the market to move on its own.
The last three days of gains were due mostly to end of quarter window dressing. Without any headline crisis, managers were under invested for quarter end and they made up for it over the last three days. There was a good bit of rotation out of the big caps into small caps and while the big cap indexes were struggling early in the week the Russell was making new highs. The surge on Wednesday was a combination of short covering and price chasing and lifted the Russell well over prior resistance at 1,452. The index is now flirting with round number resistance at 1,500. The Russell has gained 9.9% since the August 21st lows. There is a good chance for some window undressing next week.
The S&P had been averaging moves of less than 0.4% for the last month and that was no different on Friday except that the index blew out over prior resistance at 2,508 and surged to a new high over uptrend resistance as well. The majority of the gains came in the morning but there was no selling in the afternoon. If the S&P can hold over that uptrend resistance line, we could create a new trend higher.
The Dow was the laggard and missed a new high by 7 points. The round number resistance at 22,500 is looming large and that could be the hurdle for the week. The Dow has been lagging because of the rotation out of large caps and into small caps. This will eventually reverse. The small caps are now overbought and the market should equalize.
The Nasdaq recovered strongly on Friday when all the big cap techs were positive and none were a drag on the index. The tech sector was being lifted by the chip stocks with a little help from the biotech stocks. The surge over prior resistance at 6,460 was convincing and could continue next week.
There are only a few earnings next week with Costco, Yum China, Constellation Brands, Monsanto, Pepsi, and Lennar the names you would recognize.
This is payroll week with the ADP and Nonfarm Payrolls. The ISM indexes are next in importance and Janet Yellen's speech if the pothole in the middle of the calendar.
In theory, the market should move up over the next five weeks but the first two weeks of October are typically volatile. Some of that volatility is related to the political deadlines that have been removed. Some is the portfolio restructuring between the end of Q3 and the start of Q3 earnings. That will occur over the first two weeks of the month.
Investors do not believe the market is going lower. Every minor dip is bought. It could take a major headline to break that trend. North Korea is expected to launch a missile on Oct 10th, the anniversary of becoming a communist nation or on October 18th when China holds its Communist Party Congress. Rocket Man tends to do things during that event just to show he can.
The longer-term trend is positive and there is nothing on the calendar that should change it. That is almost scary. I would continue to hold some cash in reserve just in case a buying opportunity appears.
Enter passively, exit aggressively!
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