Investors continued to buy the dip in U.S. stocks last week. Stocks popped on the delayed September jobs data since market participants saw the worse than expected jobs data as QE friendly. The very next day (Wednesday) saw gains reverse as traders worried that the Chinese central bank might tighten their monetary policy. Fortunately for the bulls there was no follow through lower and the S&P 500 index drifted to another new all-time high by Friday's closing bell.

Economic Data

U.S. economic data last week was mixed. The Kansas City Federal Reserve manufacturing index improved from a reading of 2 in September to 6 in October. Numbers above zero indicate positive economic growth. Meanwhile the PMI data for October fell from 52.5 to 51.1. That's the lowest level in a year and nearing the flat line. Numbers below 50.0 suggest a contracting economy.

Durable goods orders produced their largest gain in three months with a +3.7% surge. Railroad traffic improved to a six-month high. Both readings would suggest an improving U.S. economy. Yet the University of Michigan consumer sentiment index fell from 75.2 to 73.2 for the final reading in October. Falling consumer sentiment usually doesn't bode well for consumer spending, which is supposed to account for almost 70% of the U.S. economy.

Of course the biggest report for the week was the nonfarm payrolls (jobs) report, which was delayed from its intended October 4th announcement due to the government shutdown. The jobs report came out on Tuesday morning and economists were expecting +180,000 new jobs in September. Unfortunately the U.S. only added +148,000, at least until that number is revised. The August jobs number saw a revision higher from +169K to +193K. Stock market participants looked at the September reading of 148K as QE friendly. Lower than expected job growth should keep the U.S. Federal Reserve on the sideline. Suddenly expectations for the Fed to taper their QE program have been pushed back to the second quarter of 2014, likely in June. Given the stock market's love affair with QE the market rallied on this jobs data.

Overseas Data

Economic data overseas was mostly positive. The Eurozone said their manufacturing PMI rose from 51.1 to 51.3 While Germany's manufacturing PMI climbed from 51.1 to 51.5. Numbers above 50.0 indicate economic growth. Germany also upgraded their 2014 GDP estimate from +1.6% to +1.7%. 2013 is expected to settle with +0.5% GDP growth. Investors seem to believe the worst is behind it for Europe. European equity funds saw their largest weekly inflows ever at $5 billion.

Most of the market-moving data from Asia came out of China last week. Housing prices in China continue to climb with real estate surging +9.1% month over month. HSBC's Chinese manufacturing PMI reading improved from 50.2 to 50.9. Yet Asian markets were weak. Worries that the Chinese central bank might tighten their monetary policy to fight inflation pressures sparked selling. The global equity market's dropped on Wednesday over these concerns. Asian markets continued to fall on Friday with both the Japanese NIKKEI and Chinese Shanghai down sharply, -2.8% and -1.5% respectively.

Major Indices:

The rally in the S&P 500 index continues with another new record high on Friday. This index is now up 112 points or +6.8% from its October 9th intraday low. That was only twelve trading days ago. I'm worried that stocks are short-term overbought here. A normal retracement of this move could mean a -30 to -60 point pullback. Of course there is nothing to suggest the rally is going to stop here.

The 1760 level does look like short-term resistance on an intraday chart. A breakout here probably means a sprint toward 1780 and by that time market bulls will be eyeing the 1800 level. If stocks do see any profit taking then levels to watch are probably 1740, 1730 and the 1700 level.

Year to date the S&P 500 index is up +23.4%.

chart of the S&P 500 index:

The stock market's sell-off on Wednesday wasn't that bad for the NASDAQ. This index bounced from its morning lows. Two days later the NASDAQ was hitting new 13-year highs with a spike above the 3950 level. Currently momentum is carrying this index higher but eventually it will see a correction.

The NASDAQ is quickly approaching what could be significant round-number, psychological resistance at the 4,000 mark. Until we get there the 4K level might act as a magnet, pulling the NASDAQ higher. Once the NASDAQ hits it the magnet could be turned off and the index may see a correction lower. I don't see any real support until the 3800 area.

chart of the NASDAQ Composite index:

The small cap Russell 2000 index also hit new all-time highs. On a short-term basis the $RUT seems to be struggling with resistance in the 1120-1122 area. You'll also notice on the chart below that the $RUT is nearing resistance at the top of its bullish channel. The next week could see a test of that trend line (of higher highs) and then a correction lower.

Look for short-term support near 1100 and 1080.

chart of the Russell 2000 index

Economic Data & Event Calendar

We face a busy week of economic data. We'll get consumer confidence, some residential real estate data, wholesale and consumer level inflation numbers and a lot more. The big event for the week will be the two-day FOMC meeting. The meeting ends on Wednesday. No one expects the Fed to change interest rates so the focus will be on the Fed statement.

Economic and Event Calendar

- Monday, October 28 -
Industrial Production (for September)
Pending home sales

- Tuesday, October 29 -
Consumer confidence for October
U.S. retail sales for September
Producer Price Index (PPI)
Case-Shiller 20-city home price index
FOMC meeting begins

- Wednesday, October 30 -
ADP Employment Change report
weekly MBA mortgage index
Consumer Price Index (CPI)
FOMC meeting ends with decision and statement

- Thursday, October 31 -
Weekly Initial Jobless Claims
Bank of Japan interest rate decision
Chicago PMI data
Eurozone unemployment data

- Friday, November 01 -
ISM index
vehicle sales in the U.S.

Additional Events to be aware of:

Nov. 7th - U.S. Q3 GDP estimate
Nov. 8th - nonfarm payrolls (jobs) report data

The Week Ahead:

Looking at the week ahead of us I would be cautious when it comes to launching new positions. The trend is obviously higher. Yet U.S. equities look short-term overbought. Eventually this momentum is going to run out or at least pause. It's not uncommon for a rally to proceed in a three steps forward and then two steps back sort of pattern. We are still in the midst of Q3 earnings season. The bulk of the results have already been announced and investors seem pleased with the numbers. Unfortunately there is a trend that the deeper we get into earnings season the weaker the results. If we suddenly see a parade of disappointing earnings results it could sour investor sentiment.

Bigger picture we remain bullish. The disappointing jobs data this past week has pushed expectations for any taper to the Fed's QE program into the second quarter of 2014. That suits the stock market just fine. October is the beginning of the best six months of the year period for stocks. Thus far October is off to a good start. I would wait for a pullback before rushing into launch new bullish positions.