Normally a 4% gain in a month is a good month. Last week the Dow gained +3.7% and the Russell 2000 +4.6%. That would be a good month except that we are just getting started in October.
The month of October is known as the "bear killer" because the rebound from the early month lows typically begins the Q4 rally. The Dow has averaged +12.3% gains between Halloween and Christmas since 1994.
So where are we going this quarter? The indexes have rebounded strongly from the lows with the Dow adding +1,144 points since September 29th. That is a +7.2% rebound from the lows. Normally that would be a caution signal that the index was over extended and in need of a rest.
With the Q3 earnings cycle likely to weigh heavily on the Dow any further gains will be hard fought. Nearly all of the 30 Dow components are expected to miss on revenue expectations. That could also lead to misses on earnings except that the Dow 30 stocks are pretty good at financial engineering and they will do everything possible to avoid an earnings miss. That includes buying back additional shares and moving charges and expenses around to increase earnings. Whether it will work this time is of course unknown.
The Dow is in relatively unsupported territory. The index crashed so fast in August that support levels were not created. The support from December/January at 17,069 was not even a blip on the chart in the August decline. Friday's close at 17,084 is slightly over that level but not enough to be important. There is no support/resistance in the vicinity of Friday's close.
If I were betting on Monday, I would expect some profit taking. I think the rally has legs at least until the Dow components begin releasing earnings then it could get a little dicey. Because fund managers need to buy performance between now and their fiscal year end on Halloween, I expect any dips to be bought. Once we are into November it may be a different story.
The S&P blew through resistance from 1990-2005 but came to a dead stop at the September high at 2,020. That will be the level to watch next week followed by 2,040. However, if we do get through 2,020 I do not think we will stop at 2,040. There was no pause at that level on the drop and I think traders are going to be more focused on 2,100 as the next target.
If we do pause for profit taking, there is decent support at 1,985 and 1,975. The 2,000 level may be psychological but it was ignored on the way down and had little influence on the way up.
Once the index moves over 2,040 it will enter a strong band of congestive resistance that lasts all the way to the historic high at 2,132. That band contained the S&P for six months and we are not likely to just blow right through it.
The Nasdaq 100 ($NDX) is struggling. The big caps led by Apple and the biotechs Amgen and Biogen are having a tough time moving higher. Apple's earnings are not until Tuesday the 27th or more than two weeks away. Until that event, Apple is not likely to mount any material rally. Investors are scared that the iPhone 6s is not selling as much as they expected. Weakness in Apple and continued weakness in the biotech sector is going to be a drag for the Nasdaq 100.
However, Friday's close was above downtrend resistance but just slightly. Any material pullback on Monday could put it back below the trend line and potentially back below resistance at 4,345.
The Russell 3000, the largest 3,000 stocks in the market, rebounded +7.6% from the September 29th lows. However, it has not broken through decent resistance at 1,207. This is a broad market index that had a textbook retest of the September lows. A move through 1,207 should signal a further rally but the R3K has significant congestive resistance from 1,220 to 1,275.
While I believe the market will continue higher after some profit taking, I think it will be tough sledding over the 1,220 mark given the weak earnings expectations.
Whenever a company misses on earnings the entire sector declines. With earnings reports accelerating the week of the 19th there may be a lot of sectors struggling to hang on to their gains.
The biotech sector attempted to rebound last week but the effort was half hearted. Resistance at 3,450 was rock solid. The conflicting analyst recommendations and warnings that the decline may not be over combined to prevent any material rebound. The index still posted a -2.6% decline for the week and that kept the Nasdaq from rebounding more than 2.6% compared to 4% on average for the rest of the indexes.
Based on this chart the biotechs may have farther to fall.
The Oil Service Index ($OSX) rallied +12.4% for the week. However, it came to a stop at resistance at 185 and I would probably be looking to short this rebound.
The major factor in pushing energy stocks and WTI higher was the entrance of Russia into Syria. That caused some heated conversations and plenty of headlines. Russia and Iran are allies. Iran is a Shia nation. Saudi Arabia is a Sunni nation and Iran's archenemy. With Russia's military active in Syria and the Iraq president inviting Russia into Iraq there was a great potential for a conflict with the US and/or NATO and eventually Saudi Arabia.
However, it appears the U.S. has pulled its planes out of Syria and the fleet is pulling out of the Mediterranean and heading home. The chances for a Russian confrontation have declined significantly.
With inventories rising and the geopolitical headlines likely to fade the price of oil should decline. That will take the bloom off the Oil Service Index and probably depress the market. However, predicting the price of oil is harder than predicting the weather so anything is possible.
The outlook for next week suggests some profit taking early in the week and then some concern over earnings from Intel, Netflix and the banks. I think dips should be bought but I would be cautious about buying a breakout unless we move over 2,020 on the S&P in decent volume.
The bond market is closed on Monday for Columbus Day so equity volume should be very light.
Enter passively and exit aggressively!
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