Market Summary
The S&P 500 finished higher in seven of the past eight
sessions ending with a weekly gain of 3.3%, its best week since Dec. 2015, as
investors regained some optimism after a period of heavy volatility since late
August on concerns about global growth and uncertainty about U.S. interest
rates. For the week, the Dow gained 3.7% while the Nasdaq rose 2.6%. The
gain for the Tech-heavy Nasdaq put it back into positive territory for the
year. The small cap Russell 2000 led the major indices by finishing up a
massive 4.6%. We've had a very good week and a very good start to the fourth
quarter. "We've had a very good week and a very good start to the fourth
quarter," said Peter Tuz, president of Chase Investment Counsel in
Charlottesville, Virginia. "Next week third quarter earnings season begins
in earnest. The release of last week's disappointing jobs report
contributed to the gains. The disappointing report sent a signal to investors
that the Federal Reserve might delay raising interest rates until the end of
the year. That thought was reinforced Thursday, when the minutes from the
September Fed meeting showed policymakers are too concerned about low inflation
and the slowdown in China to raise interest rates. "In short, we found
little to change our view that the first Fed hike will not occur in 2015 (and
the) market has reached the same conclusion," wrote Ajay Rajadhyaksha,
head of fixed-income at Barclays, in a report.
A tool to help confirm the overall market trend is the
Bullish Percent Index (BPI). The Bullish Index is a popular market “breadth”
indicator used to gauge the internal strength/weakness of the market. It is the
number of stocks in an index (or sector) that have point & figure buy
signals relative to the total number of stocks that comprise the index (or
sector). So essentially it is the percentage of stocks that have buy signals.
Like many of the market internal indicators, it is used both to confirm a move in
the market and as a non-confirmation and therefore divergence indication. If
the market is strong and moving up, the BPI should also be moving higher as
more and more stocks are purchased. Last week analysis opined “…the recent selloff might be over...support
held this past week; now the question is will prices jump higher or establish a
range-bound trend…” The updated chart below shows prices moving higher,
with plenty of room to continue upwards.
Investment Analysis
Recent comments mentioned “…while there are some historical declines in October, it also known as
the “bear killer”. More bottoms are made in October than any other month, and
while it has a negative stigma, the month overall is solidly bullish on the
historical calendar. Furthermore, the final quarter of the year is historically
the best performing period…”Investors are now positioning themselves to
respond to corporate earnings, which start in earnest next week when most of
the nation's largest banks report their results, as well as big companies like
Intel, Netflix, UnitedHealth and General Electric. Earnings are expected to
drop approximately 5.5% from a year ago, according to FactSet, primarily due to
the sharp drop in commodity prices. Financial services companies are expected
to show earnings growth of 8.4%, trailing only telecoms and consumer
discretionary companies in expected growth for the quarter. However, that
growth is down from the 14.8% expected at the start of the quarter, and down by
half from the 17.8% growth expected at the start of the year.
Last week’s Analysis discussed how
“…In the last couple of years, after
September 19th, the S&P traded lower into month’s end and made a bottom
sometime in the early part of October, and in turn rallied into years end.
That’s exactly what we could see this year as fund managers have seen their
year-end bonus disappear with the selloff. They got too short after the initial
low was made, and now need to markup stocks with a yearend rally to restore
their positive performance…” In the graph below we can see that over the
past month, 9 of the 10 major S&P sectors surged. Healthcare is the only
losing sector during this period. Now might be the time to reduce bearish bias,
but don't go overboard on the bullish side, either. The recent rally has been
led by cyclical stocks, which are composed of the Energy, Materials, and
Industrials sectors. The current move toward cyclicals follows a long stretch
in which they lagged.
By Gregory Clay
Investment Strategist
Click here to
gregoryclay@theoptionplayer.com
P.S. click on http://www.theoptionplayer.com/
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