There was no shortage of headlines as the market transitioned from the end of the third quarter and into the fourth. Volatility spiked toward six-month highs as markets and the media reacted to the first official case of Ebola in the United States. This generated turbulence for the airline stocks as traders speculated that fearful consumers may choose to travel less. Elsewhere banking titan JP Morgan Chase (JPM) unveiled that hackers had gained access to contact information to about 76 million customers and 8 million small businesses. Clues suggest the massive hack may have been done by teams in Russia. Another major story was the week-long student protests in Hong Kong.

Economic data was mixed. The data out of Europe continues to stink as the region sinks deeper into a widespread recession. Markets were unhappy with ECB President Mario Draghi's performance last week. Yet economic data in the U.S. was mostly positive. Friday's jobs number was considered a goldilocks report. Unfortunately the labor participation rate fell to lows not seen since February 1978.

The keen-eyed data miners at Bespoke Investment noted that Wednesday's widespread market decline was the 10th worst start to October for the S&P 500 since 1928. Thankfully stocks bounced on the jobs data but it was still a down week. The S&P 500 lost -0.75%. The NASDAQ composite fell -0.8%. The small cap Russell 2000 index slid -1.3% for the week. Transports held up relatively well with Friday's bounce pushing almost back to unchanged for the week. The Dow Jones Transportation Average is still up +14.6% year to date. Biotech stocks lost -1.0% as a group and the semiconductors lost -3.1%. Yet year to date the biotechs are still up +32.7% and the chip stocks are up +16.4%. That compares to the S&P 500's +6.47% 2014 gain.

The surge in the U.S. dollar continues to weigh on commodities. Crude oil lost -3.88% last week and is now down -9% for the year. This drop in oil crushed the energy stocks. The oil index fell -4.5% and the oil service index plunged -6.3%. Dollar strength is also pushing precious metals lower. Gold prices declined -2.3% last week, which pushed gold into the red for the year. Silver prices were hammered with a -4.59% loss and silver's 2014 weakness grew to -13.7%.

chart of the U.S. dollar (UUP) index

The gold ETF (GLD) is testing significant support near its 2013 lows. A breakdown here could spark the next big leg lower. You can see the trend lines crossing across the bottom of the chart. These are long-term bullish trend lines of support dating back to 2005 (now broken).

chart of the gold ETF (GLD)

Economic Data

There was a steady parade of economic data in the U.S. last week. The Chicago PMI data came in worse than expected with a drop from 64.3 in August to 60.5 in September but it is still a healthy level in positive territory (above 50.0). The Conference Board's consumer confidence index was a disappointment with a drop from 93.4 to end September at 86.0. This is the lowest reading since May. Pending home sales data was also a miss with a -1% monthly decline and a -4.1% drop year over year, both numbers below estimates.

Another disappointment was the U.S. ISM manufacturing (PMI) data, which dropped to 56.6. Economists were looking for 58.2 after the prior month's 59.0 reading. Construction spending also slipped -0.8% in August when analysts were looking for a +0.5% gain. The ISM services (nonmanufacturing) index slipped from 59.6 to 58.6, retreating from multi-year highs.

Now on to the good news. The U.S trade deficit hit its lowest level in nine months with the August reading falling to $40.1 billion thanks to an increase in exports (kind of surprising considering the rising dollar). The Association of American Railroads (AAR) said September's rail traffic numbers were bullish. The industry reported +2.7% growth in rail cars shipped compared to a year ago. This is the seventh consecutive month of year over year gains for railroad traffic. The last three weeks of September were all record-breaking highs for rail traffic in the U.S. This is bullish for the overall economy.

Of course the big report was Friday's nonfarm payrolls number. The Bureau of Labor Statistics said the U.S. added +248,000 jobs in September. That was better than Wall Street's estimates for +215,000. The August report of +142K was revised up to +180K and July's was revised up from +212K to +243K. The last twelve months have seen U.S. job growth of +2.635 million jobs. That's a monthly average of almost 220,000. Bill McBride at the CalculatedRisk blog said 2014 is shaping up to be the best year for both total and private sector job growth since 1999.

The report also showed that the average weekly hours improved to 34.6, which is the highest level since May 2008. This is good news. While the improvement was small, an uptick in hours worked normally precedes new job growth. The unemployment rate fell from 6.1% to 5.9%, which is the lowest reading since July 2008. Unfortunately this improvement was all thanks to plunging labor force participation, which dropped to a new 36-year low. Almost 93 million people in the U.S. are not in the labor force.

Overseas Economic Data

The economic slowdown in Europe continues. The Eurozone said their manufacturing PMI slipped from 50.5 to 50.3 That's awfully close to no growth (which would be 50.0). Germany's manufacturing PMI has turned negative with a drop from 50.3 to 49.9. This hasn't happened since June 2013. Germany said their services PMI rose from 55.4 to 55.7. Meanwhile France and Italy reported their service PMI's declined with France now at 48.4 and Italy at 48.8.

There was a big focus on the European Central Bank last week. The ECB left rates unchanged at 0.05%. Unfortunately ECB President Mario Draghi disappointed investors who expected him to announce some serious stimulus or QE type of program to lift Europe from this slowdown. Instead Draghi only provided a few details on their asset backed security buying program.

Economic headlines out of Asia were relatively quiet. China did see their services PMI slide to an eight-month low in September. Their manufacturing PMI data was unchanged at 51.1.

Major Indices:

The large cap S&P 500 index broke support at the bottom of its two-year bullish channel last week but thankfully the bounce on Friday lifted the index back into the range. The last three days on the daily chart do look like a bullish reversal pattern. Unfortunately if you drill down and look at an intraday chart you can see that the rebound has stalled at its short-term down trend resistance line. Thus the pullback may not be over yet.

The 50-dma at 1975, the 1980 level and the 2000 level are all overhead resistance for the S&P 500. Thursday's low hit 1926 before bouncing near its rising 150-dma.

I'm concerned that if we see the S&P 500 close back under the 1940-1950 area again it could signal a deeper correction. Currently this index has gone almost 1,100 days without a normal -10% correction so it's definitely due for one.

chart of the S&P 500 index:

Weekly chart of the S&P 500 index

Intraday chart of the S&P 500 index

The NASDAQ composite sliced through potential support near 4400 on Thursday but bounced back by the closing bell. Just like the S&P 500, the Friday rebound in the NASDAQ has stalled near its new trend of lower highs. That doesn't bode well but a breakout could spark more buying and short covering.

The 4500 level is immediate resistance. Beyond that is resistance near 4600 and its 2014 highs. If this bounce rolls over we could see the NASDAQ dip toward 4300 and its 200-dma.

chart of the NASDAQ Composite index:

Intraday chart of the NASDAQ Composite index

The small caps stocks continue to underperform the broader market. Last week saw the Russell 2000 index drop toward support near 1,080 and bounce. Yet even with the bounce this was the fifth weekly loss in a row for the $RUT. That hasn't happened since August 2011. The rebound from Thursday's intraday low stalled on Friday under short-term resistance at its 10-dma.

A Fibonacci retracement of the five-week decline in the $RUT would suggest potential resistance near 1118, 1131, and 1144. I would just adjust those to the nearest round number like 1120 and 1130.

If this bounce does roll over then everyone will be watching for a breakdown under major support near the 1,080 level. Should that breakdown occur it will be very bearish for the small caps, which could drag the market down with it.

chart of the Russell 2000 index

Weekly chart of the Russell 2000 index

Intraday chart of the Russell 2000 index

Another troubling observation is weakness in the S&P 400 midcap index. The chart below shows the midcap ETF (MDY). After a long rally higher the midcaps have produced a bearish double top. This past week has produced a breakdown under technical support at the 200-dma (not shown). What you do see on the weekly chart is a breakdown under its long-term trend of support.

Weekly chart of the S&P 400 Midcap index

Economic Data & Event Calendar

After last week's flood of economic data this week is pretty slow. The only report that market participants will likely pay attention to is the FOMC minutes released on Wednesday. If that wasn't enough there was will be herd of Federal Reserve governors speaking at various locations around the country this week. Even former Fed chairman Bernanke speaks on Wednesday.

We could get a few more earnings warnings this week. Alcoa kicks off earnings season on October 8th. The real pace of earnings reports will pick up the following week.

Economic and Event Calendar

- Monday, October 06 -
Moody's business confidence survey
German factory orders

- Tuesday, October 07 -
China HSBC services PMI

- Wednesday, October 08 -
California manufacturing survey
FOMC minutes
Alcoa (AA) reports earnings - kicks off earnings season

- Thursday, October 09 -
Weekly Initial Jobless Claims
Bank of England interest rate decision
Wholesale inventory data

- Friday, October 10 -
Import/Export prices

Looking Ahead:

The week ahead might be the calm before the storm at least as earnings are concerned. The slow and steady improvement in the U.S. economy should be healthy for earnings growth. However, about 50% of sales for the S&P 500 companies come from outside the U.S. The huge surge in the U.S. dollar could negatively impact their earnings growth. Investors and analysts will be keenly focused on corporate guidance executives look out to the fourth quarter and into 2015.

As we look ahead we should consider how the market will react to the end of the Federal Reserve's QE program. We are only about three weeks away from the Fed finally announcing the end of the program. It's no secret but stocks could still react negatively if history is any guide. The folks at Comstock funds noted that when the first QE program ended in 2010 the stock market fell -13.2% in three months. When the second QE program ended in 2011 the stock market crashed -18% in the next three months. What will happen when this QE program ends? Everyone knows it's coming. Months ago the answer seemed to be that if the Fed ends QE for the right reason (i.e. the U.S. economy is improving) then the market will accept it and we shouldn't see a negative reaction. Are investors still feeling that optimistic as they look past QE and toward the Fed's first rate hike in years (expected in 2015)?

Long-term chart of the S&P 500 index & QE

Last week one of the big stories was the first official Ebola case in the U.S. The patient, Thomas Duncan, is currently in serious condition in a Dallas hospital. The government has several people in quarantine and over 50 people being monitored to see if Duncan infected anyone else. There are also new reports of patients with Ebola-like symptoms in a Washington D.C. hospital. Another man in the state of Georgia is being monitored with Ebola-like symptoms. While this shouldn't be too surprising considering the amount of travelers America sees every day it is not a reason to panic. The U.S. is not West Africa. We have a significant healthcare system and plenty of healthcare staff to treat patients. I have no doubt we will hear about more Ebola cases in the U.S. but it will be contained. The bigger question is if Africa and the U.N. can stop the spread of the disease in Africa.

There is a good chance we could see ISIS back in the headlines. The terrorist group beheaded a British hostage last week. Alan Henning was an aid worker in Syria when he was captured by ISIS. The constant beheadings might backfire as the world public grows more insensitive to all the gory news. Let's just hope ISIS doesn't search for more depraved acts to try and grab headlines.

A beheading is not going to affect the stock market. Yet capturing Iraq's capital Baghdad might. The ISIS military is getting closer and closer to an assault on Baghdad. As many have already speculated Allied airstrikes on ISIS targets will not be enough to stop the Sunni terrorists. The group has renewed their fighting with Kurds in northern Iraq and the Shia-dominated cities in central Iraq. New reports suggest ISIS has captured the Iraqi city of Anbar and are preparing to assault Northern Baghdad soon.

In much happier news we continue to see the price of gasoline fall. We've been noting this drop in gas prices for weeks now. The good news is that as gas prices fall it gives the American consumer a little bit more breathing room. This should be great news for the upcoming holiday shopping season. We only have about 80 days left until Christmas.

Rolling the calendar over into October should also be good news. If stocks are in a decline the weakness normally ends in October. Further weakness in the next couple of weeks might be an entry point for a run towards yearend. I would suggest waiting for the bounce instead of trying to catch any falling knives.


Mark Twain's Wisdom on the Stock Market: