The U.S. stock market rally looks a little tired but traders were still buying the dip on Friday, at least in the big cap names. The market digested a lot of economic news, most of it was mixed. There was also a two-day FOMC meeting which proved to be a non-event. The U.S. dollar saw a big bounce and that pressured commodities lower. Oil fell to new four-month lows. The S&P 500's gain for the week was less than two points. The market remains on track for its best yearly performance since 2009.

Economic Data

The consumer price index look at inflation rose +0.2% in September. That was slightly ahead of expectations and above the +0.1% gain in August. Most of the move was driven by a rise in energy prices. The Conference Board's Consumer Confidence index plunged from 80.2 to 71.2 thanks in large part to the two-week U.S. government shutdown. Housing data was mixed. The Case-Shiller home price index showed a +12.8% rise year over year. The weekly MBA mortgage application index rose +6.4%, reversing last week's -0.6% drop. Yet pending home sales numbers for September fell sharply with a -5.6% decline. This was significantly below expectations for a -1.3% drop and the first year over year drop in more than two years. It's also the largest month over month drop since 2001.

The ADP National Employment Report showed private-sector jobs rose +130,000 in October. That was slightly above expectations. Most of the manufacturing data was bullish. The October reading for the Chicago-area PMI surged from 55.7 to 65.9. Analysts were expecting this number to remain flat to down. It's the best Chicago PMI reading since March 2011. Numbers above 50.0 indicate growth. Another surprise was the ISM manufacturing index reading for October, which rose from 56.2 to 56.4. Economists were expecting a dip due to the partial U.S. government shutdown. Of course there was the two-day FOMC meeting but as expected the Federal Reserve left interest rates unchanged and did not alter their $85 billion a month QE program.

Overseas Data

Overseas economic data was mixed. Eurozone unemployment rose from 12.0% to 12.2%, which was worse than expected. Not surprisingly Eurozone consumer confidence inched down from -14.9 to -15.0. We could be hearing more about Greece again as the Troika officials arrived last week to negotiate new terms for Greece's next round of bailout money.

Data out of the Asia region was positive. China said their manufacturing PMI rose from 51.1 to 51.4, which was better than expected. The HSBC manufacturing PMI for China was unchanged at 50.9, which is a seven-month high. Readings above 50.0 for these reports indicate growth and economic expansion. The Bank of Japan left its interest rate unchanged and did not alter its QE program. Japan said household spending rose +3.7% year over year and retail sales surged +3.1%. Both numbers were above expectations. Japan's unemployment rate dipped from 4.1% to 4.0% and the country said their manufacturing PMI rallied from 52.5 to 54.2.

Major Indices:

The S&P 500 hit 1775 for the first time in history last week. Unfortunately the index reversed. The index did find support at its rising 10-dma but that doesn't mean the correction is over. Friday's five-point bounce left the index in positive territory for the week. The S&P 500 managed a +4.5% gain in October and is up +23.5% year to date.

After a four-week rally the S&P 500 looks overbought and due for a larger pullback. I would expect a dip toward the September high 1730. If that level fails then the S&P 500 index may find stronger support near the 1700 level. If somehow the rally resumes then look for potential resistance at 1775 and the 1800 mark.

chart of the S&P 500 index:

The NASDAQ composite tagged a new 13-year high on an intraday basis. The index posted a -0.5% decline for the week but it's up +29.9% year to date. There could be short-term support at the 3900 level but I would expect a pullback. If the NASDAQ breaks below 3900 I would look for a decline into the 3840-3800 area. Should the index bounce then 4,000 will likely be overhead resistance.

chart of the NASDAQ Composite index:

The small cap Russell 2000 index was one of the worst performers. Wednesday's session produced a bearish reversal pattern and the $RUT continued to sink. As you can tell from the daily and weekly charts below the $RUT was already near resistance at the top of its bullish channel so a retracement was not a surprise. The 1080 and 1060 levels should offer some support. If the $RUT can bounce then look for resistance near 1120-1125 and the 1140 areas. The Russell 2000 is up +29.0% year to date.

chart of the Russell 2000 index

Weekly chart of the Russell 2000 index

Economic Data & Event Calendar

We have another busy week of economic data. The events and reports to watch are the U.S. Q3 GDP estimate, the ECB President's press conference, and Friday's non-farm payrolls (jobs) report.

Economic and Event Calendar

- Monday, November 04 -
Factory Orders data
Eurozone PMI data

- Tuesday, November 05 -
ISM Services

- Wednesday, November 06 -
weekly mortgage application index
Eurozone services PMI

- Thursday, November 07 -
Weekly Initial Jobless Claims
U.S. GDP Q3 estimate
European Central Bank (ECB) interest rate decision
ECB President Mario Draghi press conference

- Friday, November 08 -
Non-farm payrolls (jobs) report
Unemployment rate
personal income & spending data
University of Michigan Consumer Sentiment survey

Additional Events to be aware of:

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

The Week Ahead:

The Q3 GDP estimate and the jobs report could both be market movers. We also need to remember that Q3 earnings season isn't over yet. Almost 80 components of the S&P 500 index will report earnings results this week. Any significant hits or misses from some high-profile names could influence investor sentiment.

Thus far about 74% of the S&P 500 have beaten earnings estimates. That's only slightly above the 73% average. Yet corporate sales are not doing so well. Only 53% of the S&P 500 who have reported thus far have beaten Wall Street's revenue estimates. Normally we see 59% of the index beat sales estimates. The quality of earnings results tends to deteriorate the deeper we get into earnings season. Each report this week could be a little landmine for the market to avoid (or endure).

My outlook hasn't changed much from last week. Longer-term we remain bullish on equities, especially now that any expectations for the Fed to taper their QE program have been pushed out to the middle of 2014. However, short-term the market indices look tired and overbought and due for a pullback. I'd rather see stocks retreat a little bit and provide us a buy-the-dip entry point than chase stocks at new highs.