The market traded in a narrow range on Monday as many of the seasoned vets on Wall Street took the Columbus Day holiday off. Volume was light as both the bulls and bears were cautious ahead of the flurry of earnings reports that will begin to hit the market over the next several weeks.
Despite the flat day, the bulls have clearly had the momentum and it has been building. We have mentioned time and time again that the market has been in a tight trading range for nearly five months, and usually when this happens, there is a huge breakout to the upside of a massive breakdown to the downside outside of this range.
Although the bulls got an ugly jobs report on Friday, the market broke through our key resistance targets and held (Dow 10,800-11,000; S&P 1,150-1,160; and Nasdaq 2350-2,400) as the September monthly jobs had one silver lining. Weekly initial claims finally dipped beneath 450,000 for the first time this year as the private sector employment picture appears to be getting a little better.
The bulls held these important breakouts for the major averages on Monday, although all 3 indexes dipped below our aforementioned targets. The Dow gained a little over 3 points to finish at 11,010 after traded to a low of 10,977 while the high was 11,030. The index now has a shot at trading up to 11,150-11,200 with 10,900-10,800 serving as solid support.
The S&P 500 was up less than a point and closed at 1,165 after trading in a 6-7 point range. The index has slight support at 1,150 and much stronger support at 1,125-1,130 while 1,170 will be the first major hurdle in its way to a run to 1,200.
The Nasdaq also closed less than a point higher at 2,402 and briefly slipped to a low of 2,397 while making a high of 2,413. The bulls will now push 2,450 which could clear the way for a test to the 2,500 level.
We could see some serious action today as the Federal Open Market Committee will release the minutes of its most recent meeting during market hours. Everybody is counting on the Fed for more quantitative easing or “QE2″ and they will likely buy more U.S. Treasury bonds but does the market really need it?
Yes and no.
There are some who believe the market has already priced in QE2 which means a “sell the news event” or a pending correction but the bulls believe the Fed’s actions will help motivate banks to lend money because they’ll have excess reserves. However, that last sentence is key, because here lately, banks have pretty stingy with any kind of loan and the Financial stocks still have not rallied with the current market.
The other worry is that QE2 will continue to cause the U.S. dollar to depreciate which makes our exports cheaper. This is the one area we are concerned with because we have been telling you about the currency wars that is taking place around the globe. The International Monetary Fund and Group of 7 are holding meetings this upcoming weekend and there could be pressure on China to make its currency more expensive. There are “experts” who say the Chinese Yuan is something like 50% undervalued compared to the Dollar which hurts U.S. manufacturing jobs and why “some” believe unemployment is near 10%.
If there is concern for a pending correction, then this could be the wild card over the next few weeks. Other than that, 3Q earnings should come in better-than-expected as there weren’t many companies who lowered expectations or gave a warning.
There are also a number of economic reports due out this week that will affect the market. We mentioned today’s big Fed report and tomorrow, the market will digest the weekly report on U.S. petroleum supplies, along with September import and export data, and the Treasury’s budget numbers for September.
Weekly initial jobless hit the Street on Thursday, along with the September producer price index and the August trade balance. Friday will be a busy day as the September consumer price index, retail sales, the New York Fed’s Empire State manufacturing index, and the University of Michigan’s consumer sentiment index for October all are due out.
As we head to press, Dow futures are down 30 points to 10,933 while the S&P 500 futures are lower by 4 points to 1,158. The Nasdaq 100 futures are off by 5 points to 2,020. Subscribers, check the Members Area for the latest updates.