Disappointing Q3 earnings results were not enough to slow the rally in stocks. Instead new hope for additional central bank stimulus overseas and a growing expectation that the U.S. Federal Reserve is on hold fueled market gains both here and abroad. The S&P 500 index managed a three-week winning streak for the first time in months.

Almost all of the major U.S. indices delivered gains for the week but not all pockets of the market participated. Semiconductor stocks surged +3.6% while transportation stocks dropped -2.1%. Housing stocks lost -1.1%. A -3.8% plunge in crude oil sparked a similar loss in oil service stocks.

Investors continue to watch the price of oil. After trading above $50 a barrel the prior week oil settled near $47.40 a barrel. Inventories of crude oil in the United States rose +7.8 million barrels to 468.6 million. That's only 22 million barrels below the 40-year high set last year. Meanwhile Saudi Arabia is actively pursuing an oil price war with Russia. The Saudis have been selling oil at reduced prices in an effort to gain market share and undercut rivals. While that may not be new news this time Saudi Arabia is targeting markets normally served by Russia.

There has been a lot of apprehension about Q3 earnings results. Last week retail giant Wal-Mart (WMT) surprised the market by significantly lowering their guidance. It looks like giving their hourly employees a raise is going to cut margins (is anyone surprised by that?). Shares of WMT plunged -10% on Wednesday for its biggest one-day loss in decades.

There have been several high-profile earnings misses and yet Q3 earnings estimates have actually improved a little. Previously analysts were expecting a -5.5% decline in S&P 500 earnings. That has changed to -4.6%. Unfortunately Wall Street expects Q3 revenues to fall from -1.3% versus a year ago to -3.2%. We are on track for the third consecutive quarter of revenue declines since the 2008-2009 financial crisis.

Economic Data

The market digested a lot of economic data last week. The regional Fed Empire State New York Manufacturing Survey improved from -14.7 to -11.4 but that was still worse than estimates for -8.0. The Philadelphia Fed Business Outlook survey improved from -6.0 in September to -4.5 in October but that was worse than the expectation for a rise to -2.5.

The inflation picture in the U.S. is not supportive of a fed rate hike. The wholesale level look at inflation, the Producer Price Index (PPI), fell -0.5% in September. Excluding food and energy the core-PPI slipped -0.3%. Analysts were expecting a rise of +0.1%. The Consumer Price Index (CPI) dipped -0.2% in September following a -0.1% drop in August. A big drop in gasoline prices and a dip in food prices helped drive the decline. The core-CPI, which excludes food and energy, rose +0.2%.

The U.S. industrial production data rose from -0.4% in August to -0.2% in September but it was the second month in a row for a negative reading and the third decline in the last four months.

U.S. retail sales disappointing. August' retail sales were revised lower from +0.2% to flat (0.0%). September's came in at +0.1%. Yet the core rate on retail sales actually slipped -0.1%. This is a worrisome statistic since consumer spending accounts for about 70% of the economy.

We did see improvement in the late Consumer Sentiment survey, which rose from 87.2 in September to 92.1 in October. That was better than expected. Both the expectations and present conditions components saw healthy gains.

Overseas Economic Data

One of the biggest drivers for the week was a new hope for further central bank stimulus overseas. The constant parade of disappointing economic data in China, Japan and Europe has investors betting that governments will step in to energize their economies.

Japan reported their Industrial Production numbers for August fell -1.2%, which was worse than expected and followed a -0.5% drop in July. China said their CPI for September rose +0.1% but that was less than expected and below August' 0.5% gain. China's PPI plunged -5.9%.

One of the biggest stories of the week was China's trade balance numbers. Their exports declined -3.7% from a year ago in September. That followed a -5.5% drop in August. The big surprise was imports. Economists were forecasting at -15% drop in imports. China said September's imports actually fell -20.4%. It was their eleventh month in a row for falling imports. Their trade balance ballooned up to $60.3 billion.

China is due to report their Q3 GDP estimate soon and it's widely expected to come in below the 7.0% growth estimate.

Looking toward Europe the region continues to see problems with low inflation numbers. Eurostat said their gauge for EU CPI fell -0.1% in September, marking the first negative read since March. The Eurozone reported Industrial Production for August slipped -0.5%, which followed a +0.8% rise the prior month.

The markets also digested comments from two European Central Bank members who suggested the ECB needs to do more to stimulate the economy.

Major Indices:

The big cap S&P 500 index rallied +0.9% for the week. That trims its 2015 loss to -1.25%. The breakout past resistance at 2,020 is bullish. The rebound off short-term technical support at its rising 10-dma is also encouraging. Unfortunately I cannot issue an "all clear" signal. The S&P 500 has rallied into a heavily congested area with a lot of resistance.

The 2,040 to 2,133 region has several hurdles for the bulls. Right now I would focus on short-term resistance in the 2,040-2,060 range. The simple 200-dma is near 2,060 and the trend line of lower highs is near 2,040.

Daily chart of the S&P 500 index:

Weekly chart of the S&P 500 index:

The action in the NASDAQ composite was very encouraging. The index rallied +1.1% and boosted its year to date gain to +3.2%. More importantly the NASDAQ has rallied past resistance at its 50-dma and past its trend line of lower highs (see the daily chart below).

Now the NASDAQ faces resistance near 4,900 and its simple 200-dma (near 4,920).

chart of the NASDAQ Composite index:

The small cap Russell 2000 index ($RUT) underperformed its big cap peers with a -0.26% decline last week. It's down -3.5% year to date. The bounce off its midweek lows is encouraging but the $RUT has resistance near 1,170. There is also a lot of resistance in the 1,200 and 1,220 area. The simple 200-dma is at 1,216.

chart of the Russell 2000 index

Economic Data & Event Calendar

The pace of economic data slows down this week. That's probably good news since it would likely be ignored for Q3 earnings results. There will be a lot of high-profile companies reporting their earnings in the week ahead.

The market will also be listening for any clues from the Fed. Several Federal Reserve members will be speaking at various engagements including Fed Chairman Yellen who speaks on Tuesday, October 20th.

The week will start off with market reaction to Chinese data. The country will release its monthly industrial production numbers, its retail sales numbers, and its Q3 GDP estimate. There does seem to be a little confusion on when exactly this data will be announced. Looking at multiple sources some say China will provide these reports on Sunday (tonight) while others say Monday.

One of the bigger events for the week will be the ECB meeting. There is a growing expectation that the ECB needs to add more stimulus to help the economy and avoid deflation.

- Monday, October 19 -
Global markets react to Chinese economic data
(Chinese industrial production, retail sales, and Q3 estimate)
NAHB housing market index

- Tuesday, October 20 -
Housing Starts & Building Permits
Fed Chairman Yellen speaks

- Wednesday, October 21 -
...nothing significant...

- Thursday, October 22 -
Chicago area Fed survey
Kansas City area Fed survey
U.S. Existing Home Sales
ECB meeting and interest rate decision
ECB press conference

- Friday, October 23 -
...nothing significant...

Additional dates to be aware of:

Oct. 28th - FOMC meeting
Nov. 3rd-5th - U.S. debt ceiling deadline
Nov. 18th - $14 billion in U.S. social security payments due
Nov. 26th - Thanksgiving holiday (markets closed)
Dec. 16th - FOMC meeting, new forecast Dec. 16th - Fed Chairman Yellen's press conference
Dec. 24th - Christmas Eve (market closes early)
Dec. 25th - Christmas (market closed)

Looking Ahead:

U.S. Debt Ceiling

Looking ahead we are going to hear more about the U.S. debt ceiling deadline. A few days ago U.S. Treasury Secretary Jack Lew warned that the country could run out of cash on November 3rd, which is two days earlier than previously estimated. According to Lew, "at that point, we expect Treasury would be left with less than $30 billion to meet all of the nation's commitments". He went on to say that $30 billion could be "quickly depleted" as the U.S. would depend on daily tax receipts for income. There's a battle ahead in Washington over raising the debt ceiling and it could push some investors to the sideline.

Holiday Sales

If you have been shopping lately then you've probably noticed all the Halloween decorations around your local shops. The holiday season is coming. Thanksgiving is only six weeks away. Christmas is only 67 days away. Many retail stores rely on the fourth-quarter holiday shopping season to bring in up to one-third of their annual sales.

The market will be sensitive to any holiday sales forecasts. Analytics firm RetailNext is forecasting foot traffic to fall -8% this year. They only see a +2.8% rise in sales. The National Retail Federation is a bit more optimistic and they are forecasting a +3.7% improvement in holiday sales but that is a little bit slower than last year.

Q3 GDP forecast

GDP forecast for the third quarter continues to slip. The Atlanta Fed's real time GDP Now forecast has fallen from +1.0% to +0.9%. Wall Street analysts' estimates have fallen from +3.2% in July down to +2.0%.

Investor Sentiment

You might think that the market's three-week rally would turn more investors bullish. However, bullish sentiment sank -3.4% to 34.1% last week. The AAII survey also saw bearish sentiment decline to a three-month low at 27.1%. It looks like traders are skeptical of the rally but they are not convinced enough to actually short it.

I wouldn't fret too much about this sentiment yet. Bull markets tend to climb the "wall of worry". The current set of "worry" has pushed traders to sit on the fence.

FYI: Bullish sentiment has been under the long-term average for 29 weeks in a row. It's been under 40% for a record 33 weeks in a row.

Investor Sentiment Survey (AAII)

Source: AAII

More Confused Than Ever!

One of the reasons investors are turning neutral on the market may be out of confusion. If you have felt confused about the market's performance you are not alone. Credit Suisse said their clients are more confused than ever!

Andrew Garthwaite, from Credit Suisse, has been talking to clients. Essentially everyone is struggling to understand the market.

Over the past few weeks, the Credit Suisse global equity strategist and his team have met with customers in the U.S., Europe, and Asia. The takeaway is that everyone is baffled by the market.

Following meetings with clients in the U.S., Europe and Asia over the past few weeks, we make the following observations: Confusion: Never have we seen so many clients who just do not know what is happening and have cashed up. ...The wall of bearishness was extreme in the US - roughly 80 percent of meetings - but much more balanced outside the U.S. (maybe because markets started to rally in the meantime). Often in the U.S., the question was 'why isn't this a bear market?'.

In Asia, on the other hand, most investors were less concerned about China (though, we have always found the closer you get to China geographically, the less concerned investors are about China).

Sure, the markets have been more volatile lately and nobody can seem to agree on when the Federal Reserve will finally move off of its zero interest rate policy, but there are a number of other reasons investors wanted to move to cash until the future is a bit clearer.

The Bloomberg article continues and outlines a few reasons why investors might be moving to cash. You can read it here.

Seasonal Market Performance

The normal early October weakness did not show up this year. According to the research team at the Stock Trader's Almanac, this October's rally in the S&P 500 has delivered the best performance since 2011. The rally also made it the 8th best start to October for the S&P 500 since 1950.

Now we are entering the second half of the month when stocks normally tend to rebound off their October lows. Except this time we didn't get any new October lows. Instead the market is up three weeks in a row.

Mutual and hedge fund managers have a choice to make. Most funds are underperforming their benchmarks this year. October 31st is the fiscal year end for many of them. They have two weeks left. This is the time they would typically window dress their portfolios to look good when they mail out their statements next month. That would suggest these guys will be buying the dips between now and month end and likely chasing breakouts higher.

~ James