The most volatile six-week period of the year is over but the next two weeks could still be rocky.
While the next two weeks could still be volatile, it is the last two weeks of October we should be expecting. The last two weeks of October are typically bullish as portfolio managers complete their restructuring ahead of the fiscal year end for equity funds on October 31st.
Market lows for the second half of the year typically occur in the first two weeks of October. Managers buy the dip and the Q4 rally begins.
I do not expect any material market decline over the next two weeks. We could have some volatility but I would expect Dow 18,000, S&P 2,120 and Nasdaq 5,200 to provide solid support. If we break through those levels something unexpected will have to cause it.
With earnings expected to rise in Q4 for the first time in six quarters, fund managers should be buying stocks using every penny at their disposal.
After a rocky three weeks with declines to critical support the indexes all have positive charts but with some better than others. The indicators are all turning positive and volume is increasing. Volume on Thursday and Friday exceeded 7.5 billion shares on both days. Advancers were 5:2 over decliners on Friday.
The S&P is testing resistance at 2,175 with the new high resistance less than 1% higher at 2,193. The daily candles are shrinking and there is a solid pattern of higher lows.
The Dow chart is less bullish than the S&P because the pattern over the last three weeks does not have the same upside bias. There is solid resistance at 18,350 and again at 18,400. There is still a pattern of higher lows but it is weaker than the S&P. The narrow 30 stock index is constantly impacted by major moves in individual stocks. The week before it was Apple and last week was Nike. Every week some stock is misbehaving and causing trouble. With earnings starting in two weeks, we should see some positive trends develop in the individual stocks and provide a positive bias to the Dow.
The indicators for the Nasdaq Composite Index are actually fading slightly after the index made a new high on September 22nd. The trend is still positive and I fully expect a new high but the indicators are urging caution.
The Nasdaq 100 big cap index has a slightly more bullish bias with Friday's close only 16 points from another new high. The trend may not be as clean we would like but I am sure we will all celebrate when the index surges over 4,900. The historic high close from the prior week was 4,891 and resistance is 4,925. Comparing the last two months of activity with the July gains is disappointing but that was an extraordinary rally. The last two months of consolidation have been uneventful with the exception of the September 9th crash. The rebound was solid and we cannot complain.
The small cap S&P-600 index has run into some serious resistance at 758 but that is only 7 points from the historic high. There is nothing bearish about this chart. Support at 730 was rock solid and the index has rebounded back to the highs. Some would call this a double top but the pattern does not fit. For me there was not enough time between the two tops. This was just profit taking from a new high and then a repeat when that high was tested again. As long we the 730 support remain firm the small caps are in good shape.
The Dow Transports are about to break out to the high for 2016. This is very bullish for the broader market, especially since they are doing it despite rising oil prices. The Transports have been consolidating for more than a year after the railroads fell out of favor when oil prices crashed and airlines added too much capacity. A break out this week would be strongly market bullish.
The biotech index is the spoiler for the week. The sector failed at resistance and declined back into the congestion range. This is headline related with politicians and Congress taking almost daily shots at the sector for the last month. However, we need the sector to heal and break out of that congestion if the Nasdaq and Russell indexes are going to move higher. There are a lot of biotech stocks and they all move in relation to the sector rather than individually.
Lastly, crude prices rallied and supported the market on the OPEC headlines. I believe those headlines will fade along with the price of oil. The $48.50 level is solid resistance and without come kind of commitment out of Saudi Arabia and Iran the headline spam can only keep prices elevated for so long. This is historically the weakest period of the year for demand and prices and so far they have been able to artificially lift the prices. How long it will last is unknown. In general, the market will move in the direction of oil prices. Other factors like the dollar, biotechs or techs in general can overcome that relationship on a temporary basis. Lately the dollar has been docile and has not exerted much influence on oil prices. That could change the closer we get to the December Fed meeting.
Friday was quarter end and it was accompanied by a lot of window dressing. Next week begins a new quarter and the obligatory window undressing where those positions are reduced so money can be used elsewhere. When funds near the end of the quarter with cash on hand, they tend to throw that cash into whatever big cap position they already have in order to keep their quarterly statements from showing a lot of cash on hand. Once the new quarter begins, they can recover that cash as needed and put it to work elsewhere. That means big cap stocks can tend to be weak in the first few days of the quarter.
Enter passively and exit aggressively!
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