Over two years ago European Central Bank President Mario Draghi promised to do whatever it takes to protect the EU from the region's financial crisis. Now that the crisis is flaring up again amidst a significant economic slowdown there were rumors the ECB might starting buying corporate bonds as part of their own QE program. The central bank denied the rumors but the story still helped fuel a rally in equities. The combination of oversold conditions in stocks, the ECB story above, and slightly better economic data out of China, Japan, and Europe helped produce the S&P 500's best weekly performance of the year.

The U.S. market's sell-off from the September high to the October low destroyed about $2 trillion worth of stock valuations. In the last seven trading days the market has recovered a significant portion of those losses. The S&P 500 is up +8% from its October 15th low near 1,820. The rebound last week was impressive. The Dow Industrials rallied +2.59%. The small cap Russell 2000 gained +3.3%. The S&P 500 soared +4.1%. The NASDAQ composite added +5.29%. Banks were up +3.8%. The transportation stocks climbed +5.1%. Semiconductor stocks delivered an electrifying +6.38% gain and the biotechs outperformed them all with a +7.5% surge last week.

Economic Data

It was a quiet week for U.S. economic data. Mortgage rates hit their lowest levels in a year and that fueled a +23.3% rise in refinance applications. Yet applications for new mortgages actually dropped -4.8%. Existing home sales hit their highest levels since September 2013 with a rise from an annual pace of 5.05 million homes to 5.17 million. The sale of new homes hit a six-year high with the annual pace hitting 467,000 in September. The August number was revised lower from 504K to 466K. Given such a sharp revision we might want to eye the September reading with skepticism. The average price on a new home dropped -4.0% year over yet. That was the first price decline in months.

Overseas Economic Data

Earlier I mentioned that better than expected economic data overseas helped fuel the rally. That's true but only because investors focused on the latest PMI data and not all of the economic headlines. The Eurozone reported their manufacturing PMI numbers came in at 50.7. That's up from 50.3 and better than the expected drop below 50. Germany also saw improvement with rise in its manufacturing PMI data from 49.9 to 51.8. France went the opposite direction with a drop from 48.8 to 47.3, which was worse than expected. Numbers above 50.0 suggest economic growth and below 50.0 means economic contraction.

Europe remains in serious trouble. A little uptick in their PMI numbers doesn't mean their issues are over. The EU is headed for its third recession in six years and much of the region is poised to see deflation. That's disturbing when you consider Europe accounts for almost 20% of the global economic activity. Spain did see some improvement with its unemployment with a drop 23.7%, the lowest level since 2011. Yet France said their unemployment hit a new record high.

We're going to hear a lot more about Europe on Monday as the market digests the ECB's stress tests. After a year-long test the central bank is unveiling which of the largest 130 European banks failed their stress test. There was a leak on Friday and Bloomberg disclosed that 25 of the banks will fail the test. Yet this negative headline was softened by news that ten of these banks have already raised new capital and ten more were in the process of shoring up their finances.

Looking toward Asia there was some improvement in Japan with their manufacturing PMI hitting a seven-month high at 52.8, which was better than expected. China also saw its manufacturing PMI rise from 50.2 to 50.4, also ahead of estimates. Unfortunately China unveiled that their economy is growing at its slowest pace in five years. Their Q3 GDP number showed growth slipping from a +7.5% pace to +7.3%. China also saw its average home price fall for the fifth month in a row. The slowdown in real estate seems to be picking up speed with all 70 cities survey showing declines and the average drop has grown from -0.5% to -1.3% year over yet.

Major Indices:

The S&P 500 has gone from oversold to overbought with an seven-day, +8% bounce. Now the rebound is nearing potential resistance at its simple 50-dma. On the weekly chart you can also see the S&P 500 is nearing what could be resistance at the bottom of its broken bullish channel. Year to date the S&P 500 is up +6.3%.

chart of the S&P 500 index:

Weekly chart of the S&P 500 index

The NASDAQ composite's rebound is equally impressive with a 367-point bounce from its October 15th low. The 4500 level should be round-number resistance but so far momentum favors the bulls. If the rally continues the 2014 highs near 4600 will be the next significant challenge. The big bounce has left the NASDAQ with a +7.4% 2014 gain.

chart of the NASDAQ Composite index:

Intraday chart of the NASDAQ Composite index

The small cap Russell 2000 index ($RUT) is up about +7.5% from its October low. Year to date the $RUT still has a -3.8% loss. The 1120-1150 zone could be tough resistance to rally through. I'm still worried the small caps could be an anchor slowing down the rest of the market.

chart of the Russell 2000 index

Weekly chart of the Russell 2000 index

Economic Data & Event Calendar

The pace of economic data picks up this week. We will get two looks on consumer confidence and sentiment. There will be two regional Federal reserve surveys. Thursday will bring the U.S. Q3 GDP estimate. Yet the big event for the week is probably the two-day FOMC meeting. The meeting ends on Wednesday and the Fed should officially put the nails in the coffin for its QE program. The focus will be on the Fed's statement.

Meanwhile Q3 earnings season continues. It will be another busy week of corporate results. We saw a lot of high-profile earnings misses last week with the likes of IBM, KO, MCD, and AMZN. Yet for every miss there was another beat. Of the 300+ S&P 500 components who have reported about 65% have beaten estimates. That's a little bit below average but earnings growth is coming in at +5.1%, which is better than the expected +4.1%. Less than half the companies reporting are beating Wall Street's revenue estimates, which is a potential warning signal.

Economic and Event Calendar

- Monday, October 27 -
Pending Home Sales
Texas regional manufacturing survey

- Tuesday, October 28 -
Durable Goods
Richmond Fed manufacturing survey
Case-Shiller 20 city home price index
Consumer Confidence
FOMC meeting begins

- Wednesday, October 29 -
FOMC interest rate decision

- Thursday, October 30 -
Weekly Initial Jobless Claims
U.S. Q3 GDP estimate

- Friday, October 31 -
Personal Income & Spending
Employment Cost Index
Chicago PMI
University of Michigan Consumer Sentiment survey

Additional Events to be aware of:

November 7: Nonfarm payrolls (jobs) report
December 17: FOMC meeting

Looking Ahead:

Looking ahead investors should remain encouraged by the weakness in crude oil. We've touched on it before. The huge drop in crude oil prices has fueled a significant decline in gasoline. AAA reports that the average price of a gallon of gas in this country is now $3.05. That's down from the April high of $3.70. Globally the drop in fuel prices could equal more than one trillion dollars worth of economic stimulus as money normally spent on fuel can now be spent somewhere else. Jeffrey Gundlach, considered by some the new bond investor king, is predicting that the drop in crude oil isn't over yet. Gundlach expects another $10 drop toward $70 a barrel.

Lower fuel prices should be bullish for the upcoming holiday shopping season. The National Retail Federation is forecasting a +4.1% increase in spending this year. That's up from +3.1% a year ago and better than the +2.9% 10-year average. I would not be surprised to see spending actually surpass the 4% estimate. The real winners this year will probably be online shopping. December 1st will be Cyber Monday, which is the first Monday after Black Friday. It will make plenty of headlines as the growth is online shopping is expected to soar.

If you are a Game of Thrones fan then you know that "Winter is Coming." The situation in Eastern Europe could get a lot more intense as winter approaches. Russia has proven itself to be a bully and it knows that most of Europe relies on Russian natural gas to heat their homes. If Russia decides to use its natural gas supplies as leverage again it could get ugly. This could be another thorn in the market's paw over the next few months.

The month of October is known for its volatility and this year October has delivered on that seasonal trend in spades. Looking at the week ahead I suspect that we will see stocks consolidate sideways the next three days as investors wait to hear from the Federal Reserve on Wednesday afternoon. Once the FOMC decision is published we will probably see a spike in volatility on Wednesday afternoon. Thursday and Friday could be driven by earnings news or the Q3 GDP report.