U.S. stocks closed Friday with strong gains for the week, leading the S&P 500 Index to possibly finish October with the biggest monthly gain since 1974. Stocks continued their rally after the European rescue fund was boosted to 1 trillion Euros and banks agreed to a voluntary writedown of 50 percent on their Greek debt holdings. Equities found more reasons to climb after a Gross Domestic Product (GDP) report showed that the U.S. economy expanded in the third quarter at the fastest pace in a year. Gains in consumer spending and business investment were the main drivers of the expansion. Consumer confidence also unexpectedly rose in October and unemployment claims dropped week over week. All of this caused raw-material and financial stocks to lead a rally in all 10 industries of the S&P 500 and gave the index a weekly gain of nearly four percent.
As I usually like to look at longer-term charts for perspective let us now turn to two monthly charts. Before October the S&P 500 had fallen five consecutive months, mostly driven by concern the debt crisis would curtail global growth. So after five negative months it would have been expected to see a rise in stocks for the month of October…although maybe not the second best month for stocks, ever! Such are the current times however where volatility is as volatile as stocks themselves thanks in large part due to the wildcards that remain in politicians’ hands.
Those hefty gains also left their mark on the monthly charts. On the two charts below note that both the S&P 500 and the Nasdaq 100 index recorded big monthly outside bars (engulfing candles). The S&P 500 held support at the 200 week simply moving average (blue line) while the Nasdaq 100 more or less finds itself right back near the highs for 2011. Such price action is bullish all else being equal and certainly something to keep in mind although not an actionable catalyst in and of itself.
While the S&P 500 rallied beyond its 61.8% Fibonacci retracement of the highs-to-lows move from this year, the European indices, at least the German DAX and the Eurostoxx 50 are still well within those resistance zones (See the two charts below). Given that the rally off the early October lows was mostly on the back of medium-term perceived positive news out of Europe it might be wise to take technical resistance clues from those indices.
And this again brings me full circle to the importance of the current crossroads. Charts across asset classes, from commodities to currencies and stocks, sit near significant resistance levels. Given the volatility of the current global macro environment however it would not be surprising to see somewhat higher levels in risk assets across the board at some point in coming weeks. Eventually however the ‘good’ news will have been priced in, fund managers will have chased the rally enough, and focus will again turn to ‘show me’ economic results that will have to back up the recent enthusiasm for risk assets.