Bruce Bittles
Stocks remained in rally mode last week, with the S&P 500 gaining another 2%. This comes as breadth continues to heal and optimism has been slow to rebuild. Stocks were further buoyed last week by evidence that the economy, particularly in the U.S., may be in better shape than some had feared.
Fresh accommodation by the central banks in China and Europe added to the equity market tailwind. While small-caps lagged their large-cap counterparts (the Russell 2000 was up only half a percent last week), sector-level leadership from cyclical areas like Technology and Industrials is encouraging.
Technically, stocks remain on firm footing. Optimism is showing some signs of returning, but there is also evidence that the rally is being received skeptically. According to the NAAIM, stock market exposure actually dropped last week. Breadth has improved to neutral (making the overall weight of the evidence slightly bullish) as various indicators show increased rally participation.
The percent of industry groups in up-trends is nearing 40% and three-quarters of the stocks in the S&P 500 are trading above their 50-day averages. The index itself (and nearly half its components) is back above its 200-day average. With evidence that an up-trend is reemerging, near-term overbought conditions become less problematic. Seasonal tailwinds gain strength as we enter the November – January time frame.
On the fundamental side, third-quarter earnings reports have been generally lackluster on both the top and bottom line even with muted expectations coming in (which seem to have actually taken the edge off of the disappointment). The focus last week was on evidence that economic conditions may be better than feared.
The housing market continues to strengthen (housing starts are at their highest since 2007), jobless claims are at a 41-year low and better-than-expected purchasing managers reports provided a hopeful sign of some recovery in manufacturing. The Fed meets this week, and while no interest rate hike is expected, it appears that a good deal of the near-term turmoil the Fed was concerned about in September has begun to diminish.
All investing involves risk, including the possible loss of principal; there can be no assurance that any investment strategy will be successful.
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Evan R. Guido
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