Current Story of the market has shifted somewhat this week as the earnings data turns mostly positive and the Fed changes their stance on stimulus and the US economic outlook. Throw in the news from Japan stimulus increase on Friday and you get the catalyst for a run higher. Or should I say we have the making of a climax run higher in the indexes short term. If this climax run continues we need to adjust our view of how we are managing our positions and focus more on the management of elevated risk. This is a point we discuss in more detail in our Trading Notes for next week.
Next week starts the economic data parade for October. We start the week with the ISM manufacturing and services data and end the week with the infamous jobs report. I am sure there will be the moments of truth in the data, but will the investor listen or chose to ignore the negative signs about the past in hope of the future? We will track all this to glean any takeaways that will help in managing our money going forward.
Below I outline the major indexes with a focus on where we are and what we are watching going forward:
The first chart below is the scatter graph of the 7 Asset Classes. As you can see the US equity markets remain the clear leaders off the bottom pivot point on October 15th. The EAFE index did make a solid move on the upside to play catch up with the US markets as the stimulus from Japan and the ECB are have a positive effect in the developed global markets. REITS are doing weill with the key warning being interest rates. Should they begin to creep higher there will be a correlated impact on the stocks within the assets class. The dollar is moving higher on the new from both the FOMC meeting and the Japanese stimulus. Treasury bonds are the laggard, but have held up well despite what the Fed is stating they are going to do about stimulus going forward. Overall the trend is higher and the positives still outweigh the negatives to the chart. Steady as we go… stops in place.
As stated above the US equity markets continue to lead overall. Breaking down the major indexes we find that the NASDAQ gained 3% on the week and has now completed the ‘V’ bottom reversal and hit a new high. The million dollar question is where does it go from here? Statistically this pattern tends to trade sideways or lower initially as the energy expended to get back to this level is greater than the value lost in the decline. Biotech has been the clear leader for the index and the financials are beginning to add some leadership to the index as well. Watching for a test of the 4560 level next week and then a continuation on the upside if the economic data confirms what the Fed pontificated in the FOMC meeting. The NASDAQ 100 index gapped to new high as well on Friday clearing the 4100 mark.
The next chart is the Russell 2000 Small Cap index. The obvious thing that pops out is the break of the downtrend line off the July highs. This took place on a gap higher Friday and is likely to test the move going forward. Regardless, the fact the sector is regaining some upside momentum again is the best positive on the week. The growth sectors have struggled in light of the Fed posturing to hike interest rates. This is one thing to watch going forward, but the positive is the shift in trend short term.
The next Chart is the S&P 500 index. The index gained 2.7% on the week and pushed to a new high as well. The leadership for the index has been of interest for the broad markets. Healthcare and Industrials have outpaced the broad index. I am not going to say that is the best leadership of a market upturn, but we will have to watch how this unfolds going forward. Energy, Consumer Discretionary, Technology and Energy are to sectors to watch if the upside move is going to advance beyond a bump from the Japanese central bank stimulus hike. The Advance off the pivot on October 15th has been a all for one and one for all type move. Still looking for some clearly defined upside leadership if this is going to gain any upside sustainability.
The Dow Jones Industrial average put together two big move on Thursday and Friday to keep pace with the S&P 500 index and help show leadership in the broad indexes. The NYSE Composite Index however is not showing the same upside enthusiasm that the other indexes have. It did move to the 10,818 mark, but needs to clear the 11,101 mark to hit a new high. That is something to watch short term as well. The VIX index fell back to 14 on the week and support. I would continue to watch to see how that unfolds relative to the sellers stepping back in if the index moves back above 15 on negative momentum. Plenty of work left to be done and we will take one day at a time.
The last chart to look at as we end the week is the 30-year Treasury bond yields. The rate now stands at 3.05% as it bounces off the recent scare of the Fed intervention on interested rates. Thus why we find it important to track the yield of both the 10 and 30 year bonds. The yields have been creeping higher in conjunction with stocks rising over the last two plus weeks. If stocks have recovered their September highs why have yields on bonds not done the same? Simply put… uncertainty relative to the Fed and the economy. So, what the Fed is confidence over the market is saying they are not so sure at this point. Look for yields to rise back near the 3.35% mark as the Fed and others deal with the confidence factor of investors going forward.
Watch and trade according to your risk tolerance. Everyone has different trading styles and you have to find what works for you and your personality. Don’t put yourself in positions you don’t understand or take risk you can’t tolerate. Not every trade results in a profit, but controlling your risk will manage the downside losses.