It was an interesting week that bulls enjoyed seeing end on a positive note, as the stock market finished Friday with a late-session win. We continue to see mixed economic news and “so-so” earnings numbers, but the Thursday and Friday bounce left the major indices higher, with weekly gains of 0.8% for the Dow, 1.2% for the Nasdaq and 0.9% for the S&P 500. It marked the third straight week of gains, and the gains we have seen since the late-August lows are solidly in place. The fact that we are now half-way through October is a great sign that October might not be a typical October.
The big positive we saw on Friday was the University of Michigan Consumer Sentiment Report that came in at 92.1 versus the expected 88.5 reading. October’s number was also up from September’s 87.2, and it suggested that we might not be in the economic doldrums that much of the economic news we have seen suggests. Yes, we saw downturns in the Empire State Index and the Philly Fed number this week, but at least consumers are still holding up well and remaining fairly confident. Consumer confidence alone is not enough to give the economy a green light, but it was still a plus for the stock market in a tough week.
The general buzz is that the Federal Reserve will not raise interest rates this year, which is the result of continuing weak economic news. Earnings season has been mixed at best, and that possibly has the Fed backing off from its hawkish stance on a rate hike as well. Financial stocks posted decent earnings this week, but the broader earnings picture is still not all that great. The strong dollar is clearly weighing on multi-nationals, which might also be giving the Fed a reason to lay low on its recent hints of an October or December rate hike.
That might be why the stock market has perked up a bit. The Nasdaq and the S&P 500 are both back above their respective 50-day and 200-day moving averages, which is a huge plus from a technical perspective. The Dow is above its 50-day moving average at 16,832, and is within striking distance of its 200-day moving average of 17,281. Having all three major averages bouncing back in unison is an extremely bullish development given that we are seeing this in October. This is a historically troublesome month for the stock market, so seeing this recent bounce continue is a big plus.
We have had various Fed Heads talking up a rate hike in the past couple of weeks, but they suddenly became quiet by the end of this past week. The numbers are just not there in terms of the economy or earnings to justify a rate hike right now, and the stock market is reflecting this scenario. Alan Greenspan warned of a “taper tantrum” if and when the Fed does raise rates, but the “tantrum” now seems to have been postponed indefinitely. Inflation is clearly not an issue, so there are few reasons for the Fed to raise rates, especially with the weak earnings and economic numbers we continue to see.
As reported on Friday, Industrial Production for September fell by 0.2%, and while that was the expected number, it followed up August’s 0.4% decline. This was yet another number that showed that the economy is simply not firing on all cylinders, and it played into the “no rate hike” theme that had stocks moving higher to close out the week. Volatility levels continued to fall, and the VIX dipped down toward 15 on Friday, signaling that the fear we saw in August and September has pretty much disappeared.
Global shocks are not on the radar right now, and even the Chinese stock market has settled down. There are still big concerns about China’s growth rate as well as global growth, but with U.S. interest rate hikes off the table for now, global growth does not seem as big of an issue. This helps explain the ongoing lift in U.S. stocks, and it has the bullish camp optimistic about the rest of the year. Once we get past Halloween, the seasonal forces could kick in, and they could drive stocks higher straight into the end of the year.
We all know that a Thanksgiving Rally, a Santa Claus Rally, and a Year-End Rally might be waiting in the wings, and these could really help a stock market that has had a rough and flat year so far. We shall see what happens, but the recent strength we have seen has been great, especially with stocks holding up well and posting gains through mid-October. That said, the Gorilla wishes each and all a wonderful and relaxing fall weekend. The leaves are falling, and we have a lot of great football and baseball on the docket, so enjoy that action as well. We will be back in action on Monday, so again, have a great weekend!
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