The stock market rally continued into the first week of November. The S&P 500 is actually down three days in a row but thanks to early gains last week the big cap index is up for a sixth consecutive week. The NASDAQ composite is also up six weeks in a row. Both indices are less than 1.5% from new all-time closing highs.

Midweek Federal Reserve Chairman Janet Yellen spoke before the House Financial Services Committee and said that raising rates in December was a "live possibility". After the better than expected jobs report on Friday morning a rate hike looks almost guaranteed.

The Fed has been watching the labor market closely and wants to see consistent growth of +200,000 jobs a month (some fed heads say +180K is enough). The October nonfarm payroll report was much stronger than expected at +271,000. More on the jobs report in a moment. The takeaway here is that the market no longer seems afraid of a rate hike.

All of the major U.S. indices posted gains for the week. Transports and technology both enjoyed healthy gains. Yet it was banks and biotechs that really led the charge higher. Banking stocks added more than +5% for the week. Biotechs were up more than +4%. Crude oil plunged more than -4% last week to settle near $44 a barrel. Yet this did not stop another rally in the energy stocks with the OIX oil index up +2.9% and the oil services index up +3.1%. The strong dollar is crushing commodity prices and precious metals are plunging as the dollar rallies to new six-month highs. Money is coming out of the bond market and the yield on the 10-year note ended the week at three-month highs near 2.33%.

Chart of the U.S. dollar ETF (UUP)

Q3 Earnings Season

The Q3 earnings season is almost over. More than 440 of the S&P 500 companies have now reported earnings. Thankfully Wall Street set the bar pretty low. Right now 74% of companies have beaten analysts' earnings estimates. That's higher than normal (about 70-72%). Unfortunately only 46% of companies have beaten Wall Street's revenue estimates. Currently the rate of earnings growth in Q3 stands at -2.2%, which is still a big improvement from the -5.5% estimate several weeks ago. Revenues have fallen -3.7% from a year ago. Most of that is thanks to weakness in energy stocks and big companies suffering negative currency headwinds due to the strong dollar.

More than 10% of companies reporting earnings have lowered their guidance for Q4. That compares to only 4% of companies raising guidance. Right now Wall Street is forecasting Q4 earnings to fall -3.7%. Big multi-national companies that do a lot of business overseas are going to have a hard time with the dollar rising. Negative currency headwinds due to a strong dollar have been a major theme all year. When the Fed starts raising rates it's going to boost the dollar even higher. This week we will hear from 17 more S&P 500 companies reporting earnings.

Economic Data

It was a busy week for economic data. The Institute for Supply Management (ISM) said their ISM index slipped from 50.2 in September to 50.1 in October. That was actually better than many expected but still marked the lowest reading since May 2013. Numbers above 50.0 suggest growth and unfortunately this index is sinking towards contraction territory. The ISM services index moved the opposite direction with a rally from 56.9 in September to 59.1 in October. Services account for a larger portion of the U.S. economy so this is encouraging.

The ADP National Employment Change Report was expected to slip. The September reading for the ADP report was revised lower from +200,000 jobs to +190K. The October reading showed +182,000 private-sector jobs. Of course the biggest economic report for the week was the monthly nonfarm payrolls (jobs) report. Last month the September jobs report was a huge disappointment at +142,000. Economists were hoping for a rebound to +180,000. The results came in better than expected.

October Nonfarm Payrolls (jobs) Report

On Friday morning the Bureau of Labor Statistics announced that payrolls had surged +271,000 in October. It was the biggest one-month advance in 11 months. The September number was revised lower from +142K to +137K but this was lost in the shadow of the huge October number.

The national unemployment rate fell from 5.1% to 5.0%, the lowest reading since April 2008. This was thanks to a gain in the Household Survey, which showed +320,000 jobs. The labor force participation rate was unchanged at 62.4%. The larger look at unemployment, the U6 unemployment rate, includes people who are unemployed and underemployed (working part-time when they want full time work). This improved from 10.0% in September to 9.8% in October.

Another improvement was a rise in average hourly earnings, which rose +0.4% in October after coming in flat (0.0%) in September. The trailing twelve months now shows earnings up +2.5%, which is the best reading in six years.

The reaction to the jobs report was significant. On Thursday the fed funds futures rate was indicating a 58% chance of a fed rate hike in December. This jumped to 70% after the October jobs report. As noted above the U.S. dollar surged to new six month highs and the yield on the 10-year U.S. bond rallied to a three-month high. The Federal Reserve has not raised rates in almost a decade and the impact will be felt around the world when they do. The IMF and the World Bank are both concerned that when the Fed starts raising rates it's going to crush weaker emerging markets.

Overseas Economic Data

The economic data out of China last week was disappointing. Their manufacturing PMI for October dropped to 49.8. Numbers below 50.0 suggest economic contraction. Meanwhile the Caixin PMI did bounce from 47.6 to 48.3 but still in contraction territory.

There was also bearish news out of S. Korea. The country's exports plunged -15.8% in October. It was the largest drop this year. S. Korea, like China, exports goods around the world. This is a clear sign the worldwide economy is slowing down. Some are suggesting it's another canary in the coal mine warning of serious trouble ahead. S. Korean exports are now down -7.5% year to date.

Meanwhile economic data in Europe is seeing some small improvement. The Eurozone said their manufacturing PMI for October rose from 51.6 to 52.3. Germany's manufacturing PMI for October saw a similar move from 51.6 to 52.1. Numbers above 50.0 suggest growth.

The European Central Bank reminded the markets on Wednesday that they are ready to boost their QE program if need be. Expectations are already rising that the ECB might raise or extend their QE program when they meet in December. Now there is speculation that the ECB might further lower their interest rates. Currently the ECB's main finance rate is already at a record low of 0.05% while their overnight rate for bank deposits is at a negative -0.20%.

Major Indices:

Stocks initially sold off on Friday morning in reaction to the October jobs number. Fortunately investors bought the dip and the S&P 500 pared its Friday loss to less than one point. It did manage a +0.95% gain for the week, extending the rally to six up weeks in a row. This big cap index is now up +11.5% from its late September closing low. As of Friday's closing bell the S&P 500 is less than 1.5% from a new all-time closing high and it's up +1.8% year to date.

Should this rally continue the 2,120 level and the 2015 highs in the 2,130-2,135 range should be overhead resistance. Eventually this index is going to see a pullback. If stocks retreat then we can look for possible short-term support at 2,080 and 2,060. The simple 200-dma is currently near 2,060. If you use a Fibonacci retracement tool on the rally from its late September low the levels to watch for support are 2,060, 2,020 and 2,000.

Daily chart of the S&P 500 index:

The NASDAQ dipped to short-term technical support on Friday and bounced at its rising 10-dma. As mentioned earlier the NASDAQ is up six weeks in a row and less than 1.5% from a new all-time closing high. The 5,165 area is short-term resistance. Beyond that the July highs in the 5,200-5,230 zone is likely resistance as well. If stocks retreat, and they will eventually, the NASDAQ could find short-term support at 5,000 and the 4,900 levels. Year to date the NASDAQ composite is up +8.5%.

chart of the NASDAQ Composite index:

After weeks of underperforming the small cap Russell 2000 index outperformed last week with a +3.26% surge. The widespread rally across the financial sector and biotech stocks really gave the $RUT a boost. This index has been trading very technically with rise to resistance and then a retest of support and then bouncing back toward resistance.

Currently the $RUT is testing resistance at the 1,200 level. Beyond that I see potential resistance near 1,220 and its simple 200-dma (currently 1,215). On a short-term basis the 1,180 area is support. Of course the $RUT tends to be more volatile than its big cap peers. If stocks retreat we could see it dip toward 1,160 or 1,140.

Year to date the Russell 2000 is almost flat for the year with a loss of -0.4%.

chart of the Russell 2000 index

Economic Data & Event Calendar

The pace of economic data slows down this week. We will hear some key reports from China and Europe. One event that will capture market headlines is Alibaba's "Single's Day" sale on November 11th (11/11). This is about five times bigger than the Cyber Monday sale in the U.S.

Towards the end of the week there are several fed members speaking. We'll also hear from ECB President Mario Draghi.

- Monday, November 09 -
EU finance ministers meet to talk about Greece
Israeli Prime Minister Benjamin Netanyahu meets with U.S. President Obama

- Tuesday, November 10 -
Chinese CPI & PPI (inflation)
Wholesale inventory data
International Energy Agency (IEA) annual World Energy Outlook

- Wednesday, November 11 -
Chinese Industrial Production
Chinese Retail Sales
(BABA) Alibaba's Singles day (sale)

- Thursday, November 12 -
Eurozone CPI
ECB President Mario Draghi to speak

- Friday, November 13 -
Eurozone GDP
Producer Price Index (PPI)
Retail Sales
University of Michigan Consumer Sentiment

Additional dates to be aware of:

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:

Lower Gas Prices Ahead

AAA had some good news for consumers this past week. On Wednesday the leisure travel and motoring organization said that the average price of gasoline in the United States was down to $2.199 a gallon. That's the lowest price, for this time of year, since 2004. While gas prices are expected to bounce in the next couple of weeks AAA is forecasting gas prices will continue to sink toward Christmas. We could see an average gas price near $2.00 a gallon for the holidays, which would be the lowest in seven years. This should be good news for retailers. Consumers could be tempted to spend this fuel savings on gifts and other holiday spending.

Stock Buybacks

Consumers are not the only ones opening their wallets this time of year. According to Goldman Sachs almost 25% of all corporate stock buybacks occur in the last two months of the year. November tends to be the busiest month. December is also very strong. Dave Lutz, head of ETF trading at JonesTrading, said this time of year is busy because "companies want to see their stocks finish on a high for the year." Plus, many companies want to finish their share repurchase programs before the year ends. This seasonal trend should provide a nice tailwind for stocks over the next several weeks.

Market Bias

My market bias has not changed. I'm still bullish between now and yearend. However, with the S&P 500 and the NASDAQ index both up six weeks in a row odds are growing for a pullback. Yet if we look at the daily charts of the major indices (S&P 500, NASDAQ, $RUT) they look ready to rally on Monday morning. I'd prefer to see a -2% or -3% pullback as our next entry point but that might just be wishful thinking on my part.

~ James