Morning Thoughts November 2

If the past five trading days weren’t nutty enough for traders I’m not sure what will qualify as such.  After a massive rally into the second half of last week, equities plunged on Monday in tune with Halloween.  Stocks still posted big gains for the month of October with the S&P 500 gaining around eleven percent.  Following renewed jitters out of Europe overnight into Tuesday equities took another beating yesterday and as they stand now have negated the entire rally from the last two weeks.

In terms of the S&P 500, while the index last week managed to climb above its 200 day simple moving average it only did barely so and with the sell-off from the past two days showed that it is meaningful after all.  More broadly speaking the index remains in the 1200 to 1300 range where I expect it to spend more time in…potentially until the end of November.  On a weekly perspective the index is still burning off the oversold readings from the August – early October sell-off, which is necessary if it wants to move lower again with force at some point within the next several months.  The index yesterday closed right near the 1220 level which in the past has served as resistance.

More immediate clues as to potential support and resistance may be taken from a closer-up chart of the S&P 500, or as featured on the chart below, from the E-Mini S&P 500 Futures.  There are two open gaps looming above the market currently, namely the ones from Monday and Tuesday morning.  As gaps have a strong tendency to fill, it would be wise to keep those gaps in mind.  They might just act as a magnet should any slight positive news come out of Europe in coming days. 

As I discussed in this column this Monday morning, the charts of the equity indices in Europe may offer us better technical clues.  The market currently is mostly driven on the back of Europe news after all.

The German Dax as roughly represented by the iShares Germany Index Fund ETF (NAR:EWG) on the chart below shows how it has found resistance right at the 50% retracement and 200 day simple moving average lines.  Keep a close eye on this etf of the European bourses directly; they will give us clues as to how much further the rally can go or at least when it may be getting tired.  So far U.S. equities have played in-sync with European indices.

Another thing to keep an eye on is the 10 year government bond yield of Italy.  While it is just one of the troubled countries in Europe it has the third largest bond market in the world and as such investors have special interest in keeping things there alive as long as possible, i.e, any fear or hope will be quickly reflected in Italian bond yields.

The biggest question in my mind remains whether equity fund managers will chase stocks higher into end of November or even all the way into the end of the year.  Why would they do so?  Most of them have meager returns at best for the year so far and if enough of them get on board they might just be able to push stocks higher and hence save their performance of the year.

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