The unexpected September market rally continues. Stocks are slowly melting higher on low volume and without much conviction but that hasn't stopped the S&P 500 index from gaining more than 7% in September. Investors waded through a mix of positive and negative headlines last week with the PPI, CPI, Consumer Sentiment, jobless claims, foreclosure numbers, and plenty of corporate news. Meanwhile the dollar surged lower, helping gold prices spike to new highs near $1,280 an ounce.

Prices are on the rise with both the PPI and CPI posting gains last week. The +0.4% jump in the wholesale Producer Price Index was higher than the +0.3% estimate and twice that of July's +0.2%. The increase helped relieve fears of deflation in the U.S. but the core-PPI, excluding volatile energy and food costs, was unchanged at +0.1%. On Friday the Consumer Price Index, a much broader gauge of inflation, rose +0.3% driven by big gains in food (+1.2%) and energy (+3.8%). Yet the core-CPI reading came in at +0.0%.

The Federal Reserve Bank of Philadelphia's general economic index was a disappointment. Economists were hoping to see this gauge of business activity rise from -7.7 in August to +2.0 in September. It did show improvement but September's reading came in at -0.7. Readings under 0.0 indicate contraction for the Delaware, southern New Jersey, and eastern Pennsylvania region.

Jobless claims on Thursday showed improvement. Economists were expecting a rise from 453K a week ago to 460K. The Labor Department said initial weekly jobless claims fell to 450,000, a new two-month low. The trend has been improving since initial claims peaked at 504K on August 13th. The four-week moving average fell from 478K to 465K. Sadly anything over 400K is still way too high. It's going to take years before employment gets back to normal.

RealtyTrac Inc. issued some dour numbers last week. The firm said August was the worst month on record for foreclosures with banks repossessing over 95,000 homes. Thus far 2010 has been an ugly year with three of the last five months hitting new all-time highs for foreclosures. Currently one out of every 381 households in the U.S. has received a foreclosure filing.

The combination of high unemployment, rising foreclosures, falling home values is having an impact on consumer sentiment. Friday saw the release of the preliminary September consumer sentiment figures. Economists were hoping for an increase what we got was a drop from 68.9 to 66.6, the lowest reading in a year. The expectation component fell from 62.9 to 59.1 suggesting consumers are growing more worried about the future. The reporting period for this data also covered part of the sharp market sell-off in August so it's not too surprising to see sentiment slipping. Bearish consumer attitudes did not seem to have much affect on their spending. The most recent retail sales figures were better than expected and many stores said it was one of the better back-to-school seasons they've seen in a while.

Stocks were also reacting to some high-profile corporate earnings. FedEx (FDX) made headlines on Thursday morning when the company missed earnings estimates by a penny with a profit of $1.20 a share. Revenues were up +18% to $9.46 billion, which was better than expected. Unfortunately traders were focused on the negative. FDX announced plans to close 100 trucking terminals and layoff 1,700 workers after the busy holiday shipping season. Management also guided earnings lower for the next quarter. FDX CFO Mr. Graf said, "We expect continued strong demand for our package transportation services through at least December". Yet CEO Mr. Smith commented on the conference call that, "We expect a phase of somewhat slower economic growth going forward." FDX is seen as a bellwether for the economy so the news is definitely bearish.

On a much more positive note the tech sector continues to outperform. There is an M&A fever for tech stocks, especially in the software industry. Investors are still focused on the tech sector for growth. Meanwhile earnings from a couple of tech titans were better than expected. Thursday night both Oracle (ORCL) and Research In Motion (RIMM) both reported. ORCL had an exceptional quarter with earnings of 42 cents a share on revenues of $7.59 billion. Wall Street was expecting 37 cents on $7.27 billion. Shares of ORCL soared to new 10-year highs on the news.

Smartphone giant RIMM reported better than expected results and strong subscriber growth. Yet shares failed to hold their gains. The stock spiked to a new two-week high and immediately reversed as traders sold into strength. Investors are very worried that RIMM is losing market share to growing competition from AAPL's iPhone and GOOG's rising brand of Android smartphones.

The stock market's upward momentum has been slowing and the S&P 500 had risen near resistance at the 1130 area. It looked like the strong earnings from ORCL and RIMM on Thursday night might be enough to push the market higher and spark a bullish breakout. The S&P 500 did rally to 1131 on Friday morning but quickly reversed and closed with a fractional gain. Technically the market looks tired. The S&P 500 is up over 8% from its late August lows near 1040 and the 1130 area has been tough resistance for months. Without a clear catalyst to drive stocks higher the market is probably poised for profit taking. Of course things could change if President Obama says something unexpected on Monday or the Federal Reserve surprises the market on Tuesday.

On a short-term basis I would look for the S&P 500 to correct toward the 1100 level. If the 1100 area fails then look for a dip to 1080. If we actually see the S&P 500 breakout higher and close over 1135 then the outlook improves significantly. I would still expect some sort of consolidation but a breakout past resistance near 1130 would forecast a move toward 1240 by year end at the very least a rally toward the 2010 highs.

Daily chart of the S&P 500 index:

Weekly chart of the S&P 500 index:

The action in the NASDAQ looks very similar. The sharp rally from its late August lows has fueled a +10% gain and the close over the 200-dma is technically bullish. Yet the NASDAQ is now overbought and due for a correction. Odds favor a pull back toward the 2250 area. I wouldn't want to chase this move. Longer-term, if the up trend continues, we are looking at a target near the 52-week highs around 2500 for the NASDAQ.

Chart of the NASDAQ index:

The small cap Russell 2000 index is slowly stair-stepping higher. The recent trend has been for a big one-day pop higher and then four or five days of consolidating sideways. Currently the $RUT is consolidating near resistance at 650 and its 100 and 200-dma. The lows in July and August look like a bullish double bottom. However, the $RUT has yet to break through the bearish trend of lower highs. While the S&P 500 and NASDAQ are challenging their August resistance the $RUT is failed to trade that high. If stocks consolidating we can expect the $RUT to dip back toward 630. If the rally continues then look for resistance near 670.

Daily chart of the Russell 2000 index:

The week ahead could have some landmines. President Obama will be speaking at a "town meeting" on CNBC this Monday. Lately the trend has been for stocks to decline when the President speaks but with the midterm elections in the near future there is no telling what he might say. The big event for the week is the FOMC meeting on Tuesday. No one expects a change in rates so the focus will be on the statement. There is plenty of speculation about further quantitative easing, which would drive the dollar lower (and gold likely higher), but some are suggesting we won't see any QE out of the Fed until after the elections in six weeks. Later in the week we'll get the initial jobless claims. Analysts are looking for a repeat of last week with 450,000 new claims. Throughout the week there will be a handful of real estate data and home sales figures.

I am hearing more and more analysts sharing their opinion for a strong fourth-quarter rally. The real question is what happens over the next six weeks? Does the market roll over and languish ahead of the elections? Or, as some contrarians are suggesting, will the market breakout through resistance now since no one expects it? Personally, I would hesitate to chase anything. Be patient and wait for a correction.

- James