October Stock Market Price Action Will be a Tough Act to Follow

October was the ultimate pollyanna month for stock market investors.

For starters, September was ugly as broad market averages closed out a negative third quarter with “throw in the towel” liquidation in out of favor names in the energy and commodity space.  This helped set the bar VERY LOW for an October rally.  Now, market averages are at the highest levels we’ve seen since early August.

The October NFP report at the end of the week looms very large as we’re at resistance levels that turned back market rallies at least a dozen times from March through August.

Monday recap:  It’s not surprising that after the strongest month of stock market performance in 4 years that we start November with a strong rally where everybody’s looking to join the party.

October Stock Market Price Action

There’s always an influx of new $$$ the beginning of each month and right now that money is going with the momentum of stocks.   Broad market averages all posted gains of at least 1%, with the strongest gains belonging to the 2 laggards last month, the Russell 2000, +2.1% at 1186 and the DJ Transports, +1.5% at 8243.

The S&P 500, +1.2% closed above 2100 for the first time since Mid August at 2104. and the NASDAQ, +1.4% at 5127 was now held its move above the benchmark 5000 level for 7 consecutive trading days.  Market Internals were very impressive with advancing issues beating decliners by 4 to 1 and 3½ to 1 on the NYSE and NASDAQ respectively.

October Stock Market Price Action

Oil and energy stocks put in a strong performance with gains of 3%+ from the refiners and the Oil Service sector, far outpacing only modest gains from the price of crude.

Two trends that were decisively broken in October were that stocks overall rallied consistently, even on days when crude declined, and Oil stocks bucked the trend of crude when it sold off from resistance at the $50 level.

October Stock Market Price Action

Note that Monday’s rally took place despite the October National ISM purchasing managers’ report at 50.1 coming in at the weakest reading in 2 years. This is of course the smallest fraction above the 50.0 Mendoza Line between economic expansion and contraction.

Clearly there are multiple forces in play driving market action:

The sheer momentum of buying that dominated the month of October is not going to be turned on a dime by a couple of disappointing earnings reports or a weak economic report.  The Drum Pounding from the ZIRP Forever cult easily translates any sign of economic weakness into their ZIRP Forever mantra if not a delusional call for QE4 and beyond.

M&A activity has been brisk the last 6 weeks and feels likely to accelerate into year end.  Corporate treasuries have huge cash reserves and are clearly opting for growth through consolidation as a much cheaper path to adding capacity than building plant equipment and hiring, all of which comes riddled with onerous regulatory and health care expenses.

Stocks became very oversold, both at the end of August and again at the end of September, as there was some “quiet capitulation in energy and commodity names at the end of the third quarter.

As the rally in October progressed and stocks showed they could rally without support from the price of Oil, investors became increasingly more confident that the August and September lows would hold.

October Stock Market Price Action | Tough Act to Follow

October Stock Market Price Action

The drive for year-end performance cannot be overstated.  When big Dough investors need to move the performance needle, they’re going to buy mega cap high beta stocks, and those are the names we’ve seen lead the rally off the late September lows.

The October NFP and jobs report this Friday is a really big deal.  It may become the tipping point for whether we get an initial interest rate hike from the FOMC at the December meeting.  Right now that’s a 50/50 jump ball.  The market might quiet down a bit going into Friday morning.

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