A Rocking Start to October Trading

Monday Recap:  Equity markets started the first full week of October the same way they left off last week, with a strong across the board rally that now has major market averages closer to the resistance levels from mid September than the recently held support levels from late August and late September.

It was only last Thursday that the S&P 500 had logged its 5th consecutive decline, and done so for the 5th time in 2015.  Now the S&P 500 has followed that up with 5 straight days of gains, totaling a +5.6% advance since holding critical support a week ago.   Taking a quick look, the S&P hasn’t rallied 5 days in a row since February 10 – 17 of this year, the only other 5 day winning streak for 2015.

A Rocking Start to October Trading

The +5.6% gain for the S&P 500 since last Monday, leads the other major averages by slightly less than 1%, with the NASDAQ +5.2%, the DJIA +4.8% and the Russell 2000 +4.7% over the same 5 day span. A  further rally from these levels in the immediate term will likely be more challenging, particularly after the explosive move the last couple of days.

First of all, we are now much closer to resistance levels from both the Sept 17 intraday highs and 50 day moving averages on all major indices.

Secondly, yesterday’s market breadth; with advancing issues beating decliners by 7 to 1 and 3½ to 1 on NYSE and NASDAQ, and an UVOL/DVOL day on NYSE of better than 15 to 1 easily beat similar stats from Friday, the uber beta Biotech stocks were unch on the day at best, and many Health Care and Hospital stocks closed well off their highs of the day.

This tells us that valuation levels are still an issue for investors, and with Q3 earnings just around the corner, there is little margin for error on stocks with stretched valuations, sporting 3 to 5 fold gains over the last few years.

Additionally,  there is no doubt there has been a tremendous amount of short covering, particularly in the energy space during the last week.  Oil has rallied a bit, and is now pushing at resistance just above the $50 level on Brent and the high $40s on WTI.  That puts the commodity right at the midpoint of the $40 support and $60 resistance level that’s market the trading range since the March lows.

I think we’d need crude to break through the $60 resistance to levels we haven’t seen in close to a year Big Dough Fund Managers to re commit to long positions in most secondary and tertiary energy names.

Finally,   Keep in mind that we’ve had virtual Radio silence from the Chinese financial markets since early last week.  In fact, they’ve been closed since last Thursday for “Golden Week” and will remain so until this Thursday(Wednesday night) in China.  Chinese President, Xi Jinping’s visit to Washington last week was largely overshadowed by the tail end of the Pope’s visit, and then the surprise announcement by House Speaker John Boehner on Friday morning.

A Rocking Start to October Trading

While Global Markets have enjoyed a break from the negative economic news loop out of China the last few days, there is still plenty of issues, and great debate over what their growth rate is and which direction it’s trending.

Third Quarter Earnings will be in full swing next week.  In the meantime, we’ll get a few “teasers” this week, just to get warmed up.  Today, PEP reports pre opening, and YUM Brands after the close (maybe a hint on China).  Wednesday morning we’ll hear from Monsanto(MON), and Constellation Brands(STZ).

Thursday morning, Domino’s(DPZ) will treat us to a breakfast pizza, and after the close Alcoa(AA) will be the first “no longer in the DJIA” stock to report (maybe more hints on China).

 

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