Equity market averages have now posted 4 consecutive weeks of gains to start the Fourth Quarter.
The S&P 500 has rallied +10.3% from its September 28 close of 1881. The S&P 500 and NASDAQ both regained its 200 day moving average on Friday for the first time in just over 2 months and the S&P 500 is now positive YTD for the first time since mid August.
How did this happen?
What started as a technical rally off a very short term oversold market, has developed into what reminds us of the relentless “risk on” ZIRP and/or QE inspired rallies we saw frequently for 2 to 3 years leading into mid 2015.
This is highlighted by short sharp declines being immediately followed by even stronger gains. We saw a textbook example of that last week when stocks had their worst 2 day decline in over 3 weeks on Tuesday and Wednesday.
This was immediately followed by an even stronger 2 day rally Thursday and Friday. The urgency of investors not to miss buying on any weakness was palpable and there was no hesitancy to keep buying as stocks went through near term resistance levels.
What has changed since August and September to accommodate this?
Clearly in August and the first half of September we were looking at a 50/50 likelihood of an initial rate hike at the mid September FOMC meeting. If not then certainly by the end of the year. Senior FED officials were not at all bashful in stating multiple times that they expected an initial move off Zero before the end of the year.
Big Dough Investors had began to make portfolio decisions to reflect at least 2 to 3 rate hikes through Q1 2016.
Their decision not to hike in mid September was followed up by a surprisingly weak September NFP report 2 weeks later, and comments from ECB president Draghi early last week that the ECB will likely put turbo thrusters on their stimulus measures within the next 3 months.
Deciphering the Stock Market 4 Week Winning Streak
Market expectations for an initial rate has now shifted out to March 2016 as the most likely lift off date. That equates to an additional 6 months of ZIRP, and of course a different investment landscape than had been anticipated just 2 months ago.
Big Dough Investors just can’t be dismissive of how 2 additional quarters of ZIRP, may impact their market performance. By their measure….. The World has Changed.
Note that the rally since the late September lows looks very much like the rally off the October 2014 lows (although we haven’t made new highs) where the rally off the late August lows was very tentative and stalled in mid September.
Where does the stock market go from here?
The biggest challenge facing investors, particularly Big Dough Investors is: Do you go “All In” for an additional 6 months of ZIRP when stellar Corporate earnings are very selective and the economy continues to send mixed signals. Taking into account the fickle communication pattern out of Senior FOMC officials, how certain are you the first hike won’t appear in December or January?
All that aside, the only safe bet is to expect minimal Market Impact from this week’s FOMC policy statement. The biggest focus may be to what degree they follow up on Impact from China and other Emerging Markets. Since they opened that door at the last meeting, some follow up is definitely warranted
The Early Line: With the S&P500 and NASDAQ sporting 10%+ gains off the lows from a month ago keep a close watch on both the Russell 2000 and DJ Transports, both of which underperformed last week. Both are also sitting just below their 200 day moving averages.
Russell 2000 | IWM
Dow Jones Transportation Average | IYT
If both the Russell and the Transports continue to underperform while the S&P 500 and NASDAQ charge higher, we’ll hear a lot of Negative Divergence chatter from technical analysts and market strategists alike