The stock market should have been a lot higher last week. The Federal Reserve's Chicago national activity index improved. The consumer confidence numbers that came out last Tuesday were better. We had much stronger new home sales figures last Wednesday (if you ignore the +/- 13% margin of error). DELL reported better than expected earnings. Intel issued a surprise positive revenue guidance. Yet the market consolidated sideways. Is the rally dying? Or is it just a lack of buyers ahead of a three-day holiday weekend and a heavy week of economic data?


I am still bullish but the recent action, especially Friday's, warrants a little bit more caution. We're trading LEAPS with a long-term time frame. A 5% or 10% correction in the market shouldn't be that big of a problem. If anything it would be a new entry point. Yet I'm not expecting anything that serious. There are too many investors waiting to buy the dips. The 1,000-980 zone for the S&P 500 should now be support. The question is, "will we test that support any time soon?"

This week brings another look at the ISM manufacturing and service data. Theses were getting closer to positive territory and if they do it should confirm the current expectation that the U.S. GDP will be positive in the third quarter. The wildcard is Friday's non-farm payrolls (jobs) report. If we don't start seeing some improvement there's going to be renewed warnings about the "jobless recovery". Positive ISM data could send stocks higher but we're also faced with the possibility that stocks merely churn sideways as investors wait for the Friday jobs data and the holiday weekend. A better than expected jobs report could be just the catalyst we need to send this market on its next leg higher.

I still believe that any dips are going to be relatively shallow, especially for the next couple of months. The end of October is the year end for many mutual and hedge funds. They're still busy chasing performance to wait for a real sell-off.

I'll repeat what I said last week: Technically the breakout over 1,020 in the S&P 500 is also a breakout past the 38.2% Fibonacci retracement of the 2007-2009 sell-off. The next Fib retracement resistance is the 50% mark near the 1100 level. I do see potential resistance in the 1060-1070 zone but odds are the market is now aiming for 1100. The 1,000-980 level should now act as support.


My long-term outlook has not changed from last week. You can review it here.

~ James Brown