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Market Outlook
The Week Beginning Monday,
October 04, 2010



Preface

I believe that it is important to point out to all my readers, especially those who are not already members of S.O.M.E. (as members are already well-aware of my trading strategy!), that the more volatile the market becomes, whether it trades up or down, is more beneficial to us, as the returns on our options increase dramatically, as observed throughout June and July, so far.

I must say I am a great supporter of the bulls, but will play-along with the bears to extract as much value from our options plays, as possible. I am a great believer in things moving forward and improving as time progresses but I also know that we have to play-the-game to extend our profits. The only catch in this type of market is “knowing” or realizing in which direction it will take, and it seems that we have been able to fulfill this decision in most cases, to gain our profitability.

Key Events This Week



up and coming

Note:-All earnings dates listed below are tentative and subject to change.

This Week’s Economic Reports

There are still quite a few major economic indicators available this week, which are:-

Monday –

  • August factory orders, and

  • Pending home sales for August.

Tuesday –

  • Services index for September

Wednesday –

  • Weekly report on U.S. petroleum supplies, and

  • September private sector employment.

Thursday –

  • Weekly initial jobless claims, and

  • Consumer credit use in August.

Friday –

  • Nonfarm payrolls report and unemployment rate for September, and

  • August wholesale inventories.


This Week’s Major Earnings Reports

earnings

Monday –

  • The Mosaic Company (MOS)

Tuesday –

  • Wolverine World Wide Inc. (WWW) and

  • Yum! Brands, Inc. (YUM)

Wednesday –

  • Constellation Brands, Inc. (STZ),

  • Costco Wholesale Corp. (COST),

  • Monsanto Company (MON), and

  • Marriott International, Inc. (MAR).

Thursday –

  • International Speedway Corp. (ISCA),

  • PepsiCo, Inc. (PEP), and

  • Micron Technology, Inc. (MU).

Friday –

  • There are no earnings reports scheduled for Friday.


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Outlook for This Week

As September's surge fades into a fond memory, the question that is on investors’ minds for the U.S. stock market is: Now what? The market shook off the summer doldrums last month, breaking out of a stubborn trading range and giving investors the second-best September on record with a gain of 8.8 percent on the S&P 500. It also racked up its best quarter in a year.

The Dow Jones industrials (INDU) were off 0.3% to 10,830, with the Standard & Poor's 500 Index (SPX) down 0.2% to 1,146. The Nasdaq Composite Index (COMP) was off 0.4% to 2,371.

The strength of that momentum will be tested this week by a round of economic data, including the much-watched non-farm payrolls report, as well as the start of third-quarter earnings season. The S&P has also been bumping up against a technical resistance level that could spark further gains if the index breaks through it.

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Trading has been in a tight range the past week as the quarter wound down and the muted action could continue in the lead up to the employment report on Friday.

"People are still exhibiting a lot of fear in their investment decisions, with so much money flowing into bond funds and Treasuries, that any uptick in economic data could catch investors off guard," said Michael O'Rourke, chief market strategist at BTIG LLC in New York.

"That should help fuel a nice fourth-quarter rally in equities." The September jobs report trumps most everything else for markets in the week ahead, and it could have a lingering effect.

Third-quarter earnings season also kicks off, with Alcoa (AA) , the first Dow stock to report, and Pepsico (PEP) , both reporting Thursday. There is a string of moderately important economic data, and chain stores release monthly sales Thursday.

The recent drama in foreign exchange markets makes the IMF/World Bank meeting in Washington at the end of the week more interesting than usual. Traders are watching for any comments on currency from attendees, after Brazil's Finance minister this past week warned about the potential for currency wars.

The Bank of Japan is slated to meet over the weekend and into Monday, and any policy moves it makes with regard to the yen will be watched closely.

Friday's jobs report, however, is the big event, and it's more weighty than usual because it could be a critical piece in the Fed's decision making process about further easing. Economists expect to see barely any change in September hiring, with the private sector delivering about 80,000 jobs. They expect total non-farm payrolls to be near zero, when including the loss of temporary government workers.

"That's really the only one (report) that has the potential to move the needle. It feels like, at this point, we're in the mode where the Fed has told us they're going to do another round of QE (quantitative easing), unless the data chases them off of it, and so far the data is not doing that," said Stephen Stanley, chief economist at Pierpont Securities.

"The only indicator we get next week that's significant enough to play a role is employment, and I think there's very little chance the employment report will be strong enough to do that," he said.

Expectations for this Week

The Bulls and the SPX 1,150 Target

Introduction - Recap of Last Week

As we head into earnings season, this past week was filled with an abundance of potentially market-moving headlines. For example, merger and acquisition activity continued, including Southwest's $1.04 billion purchase of AirTran and reports that retailer Gymboree is exploring a sale to private equity firms. There was a better-than-expected report on gross domestic product growth in the second quarter, driven in part by higher-than-anticipated consumer spending. Currency and trade wars are apparently escalating, as central banks in South Korea, India, Malaysia, Taiwan, the Philippines, and Singapore were reportedly selling their currency against the U.S. dollar. Various Fed governors spoke last week, with a takeaway being that there is little agreement on how to proceed with the fragile recovery. Finally, on Friday, a report from the Securities and Exchange Commission (SEC) and Commodity Futures Trading Commission (CFTC) detailed the cause of the May 6 "flash crash."

S&P 500 Index (SPX)

Amid these headlines, the S&P 500 Index (SPX) found itself locked in a narrow range between 1,140 and 1,150 for most of the week. These levels are of importance to technicians, as 1,150 was the site of a major short-term peak in mid-January, while the 1,140 area represents a 61.8% retracement of the April peak and July low. Should the trading range from last week expand, 1,130 would be viewed as support, with resistance around 1,170.

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QQQQ

On another note, technology stocks, as measured by the PowerShares QQQ Trust (QQQQ) and several “high flyers in 2010 have battled major resistance areas too. For example, the QQQQ tried to push up above $50 again this week, but to no avail. This area is the site of the April high and, more importantly, double the November 2008 low of $25.05.

Doubles

Speaking of "doubles," several high-flying stocks have struggled to push significantly above levels that will give them 100% returns year to date - namely VMware Inc. (VMW), F5 Networks Inc. (FFIV), Aruba Networks Inc. (ARUN), Chipotle Mexican Grill Inc. (CMG), and LogMeIn Inc. (LOGM). In researching several stocks that have more than doubled in 2010, Ifound that most hit short-term speed bumps at prices that marked a year-to-date, 100% gain. The equities listed in the table below have flirted with year-to-date doubles for the last several trading days; some have pulled back, while others have essentially danced around the key level.

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Sentiment

The SPX rallied 8.8% in September, the month's fourth best on record. I find it encouraging from a sentiment perspective that the public remains wary of stocks. For example, Trim Tabs estimated that outflows from U.S. stock funds were $12.2 billion in September. Moreover, Investment Company Institute reported outflows from equity funds have occurred for 21 straight weeks.

An article in Thursday's edition of The Wall Street Journal entitled, "You Should Have Timed the Market," concluded after analyzing Trim Tabs' data in the past decade, "...over the past decade, it was actually quite easy to time the market. All you had to do was buy when the public was selling, and sell when the public was buying."

Hedging

Above being said, last week's survey from the National Association of Active Investment Managers revealed managers increased their exposure to stocks, yet net long exposure is still not yet at peaks during the past 12 months. Looking ahead, these investors must find a reason to drive stocks higher. It could be anything from positive earnings outlooks and/or fear of being on the sideline during another fourth-quarter rally.

Hedging long positions is a popular theme among institutional investors, and Icontinue to see evidence of fund accumulation via our analysis of buy-to-open put volume on two of the three broader exchange-traded funds that we track. In addition, expiration of traditional options is only two weeks away. In the absence of an event that triggers a sell-off in equities, we could see another short-covering rally related to out-of-the-money put options expiring in the next 10 trading days.

Conclusion

A risk to the bulls is fund managers determining that portfolio protection is too expensive at present, which could result in them shying away from additional equity purchases. For example, implied volatility on index options is rich relative to historical volatility, as the CBOE Market Volatility Index (VIX – 22.51) is at a fat premium to SPX historical volatility, which has plunged to 11.98 during the past month. If fund managers find hedging too expensive at this time, it may negatively impact decisions to accumulate stocks.

Crossroads



crossroads

The market always seems to be at a crossroads and especially this year. Basically due to the fact that we have just come off one of the worst bear markets in history in 2008 (second only to the Great Depression) and then we followed it with one of the most powerful one-year rallies on record in 2009.

2010 has so far been a year of indecision for the market as it's currently up only a few percent from where the year began. And it has crossed above and below that threshold no less than 11 times in only 10 months of trading.

Each time it went down, it looked like the end of the world was starting all over again. And each time it came back, the market grew with excitement.

Now we're back on the plus side -- up about 3.9% from where the year began, but off about 3.8% from the highs of the year.

But this time it looks like the market will finally make up its mind and pick a direction.

Head and Shoulders

At the moment there is a definite head and shoulders pattern on the market which usually signals market top!

However, there are times when a head and shoulders pattern can produce a powerful upside breakout as well. In fact, this is literally one of the most potentially explosive upside signals out there.

Reasons why there could lead be an upside breakout this time:

1) A bearish signal comes when the market breaks through the neckline of the pattern. The market attempted that just a few months ago but was quickly bid back up as those lower prices were rejected.

2) A bullish signal comes when the market trades up through the descending trendline from the head to the right shoulder (which we've just seen in the last few weeks). Additionally, it has crossed the horizontal plane drawn from the highs of the left shoulder.

3) And this move has also taken out the longer-term trendline that can be drawn from the top in 2007 to the highs earlier this year.



INDU



Implications

This means the stage could be set for an explosive upside rally.

Fundamental Reasoning

  • Unemployment is still pretty high. And growth has slowed.

    But even when the double-dippers were at their loudest, the market still kept itself together - an encouraging sign.

  • Now couple this with literally record corporate profits of $1.383 trillion dollars (as reported on Thursday, 9/30/10) and corporate growth rates expected to grow even more in 2011 and things start getting interesting.

History

And let's not forget about history. In looking at the top 10 worst bear markets and their subsequent rebounds, year 1 returns averaged 55.62%. By year 3, the returns averaged 77.56%. And by year 5, the returns averaged 103.41%.

2011 marks the beginning of year 3 for this recent rebound, and with it the potential for even more gains based on this historical perspective.

Of course, we don't want to get ahead of ourselves. There are still plenty of problems out there.

But as the saying goes, 'the market climbs a wall of worry and slides down a slope of hope'. There's a sufficiently large enough wall of worry to climb at present. And on the other side is opportunity.

This is what the charts are telling us. And this is what the fundamentals and history are suggesting as well.

Hopefully the market will listen! But one thing is certain, there are plenty of stocks making their own rebounds and breakouts and you can get positioned in these right now. Take heed of which chart patterns are taking shape and what they mean, and you could be riding the next big move in the market.

Further Reasoning for a Breakout by the Bulls

As the bulls and bears keep fighting over the stock market's direction, technical indicators have become more widely scrutinized. The S&P 500 has been bouncing between the 1,140 and 1,150 levels, but has fallen back from the top end of that range in the past six sessions.

While analysts have attributed some of September's move to "performance chasing," where gains beget more gains, Michael O'Rourke, chief market strategist at BTIG LLC in New York, thinks the real action might not happen until the fourth quarter.

"I view it more as a lot of people were sitting out the volatility, waiting for a trend to emerge," O'Rourke said. "If you get that breakout above 1,150 and it looks like it's a real breakout, which will give people confidence that a real trend has emerged to the upside."

History is on the market's side. A strong September usually portends a positive October and fourth quarter, according to Birinyi Associates Inc.

When September rises 5 percent or more, October is up, on average, 1 percent, according to data from Birinyi. Only in one occurrence following that type of September gain did the fourth quarter deliver a negative result, which happened in 1939.

Commodities

As the dollar waffled, commodities prices rose. Gold continued its record setting streak, adding 1.5 percent for the week to $1,316.10 per ounce. Oil gained 6.7 percent to $81.58 per barrel, for its biggest weekly gain since February.

The dollar has been trading lower since the Fed indicated it would consider quantitative easing, which would be a new program of Treasury purchases that in theory would pressure interest rates and add money to the system. Many economists expect the Fed to announce the new program at its November meeting, if economic reports remain soft. The 10-year Treasury note gained in the past week, and as a result, its yield moved lower to 2.528 percent.

Gold

Gold is starting to become a big question mark. It's up 20% for the year and has surged above $1,300 an ounce for the first time this past week, but even people who have been gold fans for a while are starting to get nervous.

Consider the comments of Dennis Gartman, editor of the Gartman Letter. Gold, he wrote this week, "is not just overextended to the upside; it is hyperextended. It is not just overbought; it is hyper-overbought. We cannot strongly enough urge everyone to avoid buying gold here and we shall go so far as to suggest that those who are long begin the process of quietly heading for the exits and to reduce their positions to the most minimal 'insurance' positions possible."

So, the question is whether a break is near. It could be, but it needs a catalyst, not just price. It’s a case of wait and see!

Economic News

The week is relatively light on economic reports, but the jobs report on Friday is the key.

Most analysts see no real change in the unemployment rate, which was 9.6% in August. Nomura Securities and IHS Global Insight both see it rising to 9.7%.

There should be some improvement in private payrolls, perhaps as many as 80,000 jobs. But overall payrolls may be flat or lower as the last cadre of workers on the census is leaving.

Factory orders for August

Factory orders for August, due Monday from the Commerce Department. This may decline but not a lot because a drop in aircraft orders will be offset by gains elsewhere.

Pending home sales for August

Pending home sales for August, due Monday from the National Association of Realtors. This should offer a sense of whether the hangover from the end of homebuyer tax credits has dissipated.

ISM Non-Manufacturing Index for September

ISM Non-Manufacturing Index for September, due Tuesday from the Institute for Supply Management. This is fairly closely watched. The index weakened in August, reflecting the slowing in the economy.

ADP Employment Index

ADP Employment Index, due Wednesday from payroll processor ADP. This measures changes in private payrolls and can offer a hint of what Friday's jobs report will look like. If ADP shows a gain of 10,000, look for the Labor Department to show a gain 80,000 private jobs, Nomura says.

Initial Jobless Claims

Initial jobless claims is due Thursday from the Labor Department. The latest weekly report showed claims falling to 453,000 on a seasonally adjusted basis in the latest week. A continued drop will be very bullish for the economy. Yes, 453,000 is a big number. But it was 650,000 in January 2009.

Overseas Economic News

• The Bank of Japan is expected to take more monetary easing steps at its two-day policy board meeting starting Monday, according to a Dow Jones Newswires poll. The move would come as the central bank's own business sentiment survey reveals deepening concerns about the outlook for the corporate sector and the yen's uptrend shows no signs of abating.

• China hopes a U.N. climate conference it hosts next week can help narrow differences on the issue. China will host a final preparatory meeting in the northern city of Tianjin ahead of U.N. talks opening in November in Cancun in Mexico, with major carbon emitters including the U.S. and China far apart on the issue.

Other Events of Importance

Among the significant events this week are:-

• The verdict in the criminal trial of former Societe Generale SA trader Jerome Kerviel is expected Tuesday in Paris. Kerviel's actions allegedly led to a loss of EUR4.9 billion in January 2008. During the trial this past summer, prosecutors said he should be imprisoned for four years and fined for crimes that led to the biggest single trading loss in history.

• The Nobel prizes will be announced next week, starting with the one in physiology or medicine on Monday, followed by physics on Tuesday, chemistry on Wednesday, and economic sciences on Oct. 11.

COMPANY NEWS

Nasdaq OMX (NASDAQ: NDAQ) plans to introduce a new "price improvement" mechanism for options orders sent to its PHLX options exchange beginning Monday.

Johnson & Johnson (NYSE: JNJ) next week will begin shipping bottles of grape-flavored children's liquid Tylenol, which have been off the market for months due to a recall.

This Week’s Earnings Expectations

There is a handful of earnings reports in the coming week, and many analysts had been bracing for fewer positive surprises than last quarter.

"This is the first quarter in three quarters where earnings estimates were lowered, going into the quarter. I think we've had a pretty consistent pattern of having a much bumpier road in the economic calendar than we've had in the corporate news cycle," said Jefferies managing director Art Hogan. "I have a sense that earnings growth is going to be north of the 24 percent we're looking for."

Bill Stone, chief investment strategist at PNC Wealth Management, agrees that earnings could be better than expected. "The third quarter wasn't as soft as we were thinking and people lose sight of the fact that 40 percent of the S&P revenues come from overseas," he said.

Binky Chadha, Deutsche Bank's chief U.S. equities strategist, too, sees more upside. "We think the bar is low, and the earnings will beat again. The beat will not be as big but it will be 5 percent," he said. Earnings in the last couple of quarters have averaged 10 percent above estimates.

However, bear in mind that there are real concerns about some sectors, especially banks and brokerages. Companies like Morgan Stanley (MS) and Goldman Sachs (GS) have been experiencing serious declines in trading revenue. Many regional banks are struggling to gain control of their real-estate portfolios.

Luckily, the big financials don't start reporting until the week of Oct. 18.

Monday

Mosaic, which makes fertilizers, is the big report and is a play on the global recovery theme. The stock jumped more than 60% between June 30 as investors bet that food demand in Asia, Latin America and elsewhere will continue to be strong.

Tuesday

Yum! Brands reports after the close. The company owns the Pizza Hut, Taco Bell and KFC chains. Its results offer a good sense of consumer confidence. Shares are up a third this year, a signal that investors see decent growth going forward.

Wednesday

Costco, Marriott International (MAR) and seed company Monsanto (MON) report before the open. Ruby Tuesday (RT) after the close. Costco is probably the key report to consider. Shares are up 20% since the end of June as investors bet the economy won't sink into a new recession.

Thursday

PepsiCo before the open. Dow component Alcoa (AA) after the close. Alcoa unofficially kicks off earnings season, but it is also one of the smallest members of the Dow. It has been getting smaller as it retrenched to survive the recession.

Alcoa's shares are up more than 20% since the end of June, handily outperforming Pepsi's over the same time period. But for the year, Alcoa is down 24%. Pepsi is up 9.3%.

INDICATORS AND MARKET CONDITIONS

Effects of September, October, and the Fourth Quarter

Introduction

September ended last week and it was a pleasant surprise this year. It's known to be a rough spot for the market, but this year the Dow Jones Industrial Average gained 7.7% during the month. That puts it at the top of the table below showing the best September Dow returns since 1950. The last time the Dow had a better September return was 1939. You'll also see that when you look at the five best September returns (not counting this year), four of them were followed by a positive October and a positive fourth quarter. History was no guide for September of this year, but it's still good to know what has happened in the past for the upcoming month and quarter.

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October

The tables below show how the Dow has performed on a monthly basis over the last 20 years and since 1950. The numbers to the left of the tables show how that month ranks according to average return. As mentioned above, September has historically been a poor month for the market. It ranks 10th among the months over the last 20 years and it is the worst month of the year dating back to 1950.

October ranks in the middle of the pack among the months. Over the last five years it ranks fifth, and it ranks seventh since 1950. However, the rest of the fourth quarter is more impressive; November and December have historically been the second and third best months of the year, right behind April.

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Bullish Fourth Quarters

The most exciting thing about the end of September is that the fourth quarter starts. The tables below show the fourth quarter has been a great time to be in the market. It's overwhelmingly more bullish than any of the previous quarters. Focusing on the last 20 years, the fourth quarter has averaged a gain of almost 5% and it has been positive 80% of the time. The next best quarter is the second quarter, averaging a 2.5% return and positive 65% of the time. Going back farther, to 1950, shows the same tendency of the fourth quarter strongly outperforming the others.

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***Further evidence of market conditions can be seen in representations of charts below.

Tracking of SPY, DIA, IWM and QQQQ

Introduction

Despite an ominous looking reversal candle that formed on Thursday, the markets basically took a rest break last week. They spent the beginning of the week trading in a fairly narrow range before gapping up and hitting new highs on Thursday, which also happened to be the end of the month and third quarter. After hitting new highs, the markets reversed and traded down for the day on an increase in volume. This reversal has many traders worried of a possible top, and while this reversal may certainly mark a short-term high, the markets remain in a holding pattern above some support levels.

The S&P500 as represented by the S&P 500 SPDRS (NYSE:SPY) ETF cleared its base a couple of weeks ago and has held above prior resistance near $113 for virtually the entire time. Despite a few blips, the overall action is constructive as the bulls have given up very little ground since setting a higher high earlier in September. The $112-$113 area is starting to firm up as support and should be an important level to watch moving forward. Despite the overall strength, the possibility does exist for a steeper pullback and the $110.50 level may be another area to watch on weakness. This is approximately where the 50-day moving average is and also a level that has seen much trading volume.

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The Diamonds Trust, Series 1 (NYSE:DIA) ETF which tracks the Dow Jones Industrial Average also held above its breakout area despite closing slightly lower for the week. The weekly candle printed as a doji, signaling some indecision, but overall the price action remains positive. With DIA possibly stalling, it is certainly a possibility that DIA will pull back and the primary level to watch would be the breakout area near $107. If DIA continues to trade sideways, then last week's high would be the clear level to monitor. This was the area where the markets clearly saw sellers, and a move above this level could catch some bears off guard.

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Tech stocks as represented by the Powershares QQQ ETF (Nasdaq:QQQQ) have clearly seen some selling last week, as every day finished lower than the preceding. Volume has also picked up last week, showing some urgency on the part of sellers and this trend needs to be watched. Much of the decline can be attributed to the overall weakness in Apple, Inc. (Nasdaq:AAPL) last week, which is a large component of QQQQ. However, despite the clear selling, overall QQQQ has not given up much ground and remains above a prior resistance level near $48.75. This would be a level to watch on any short-term weakness, but the more important level to watch would be the $47 level which was cleared in early September.

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The small caps as represented by the iShares Russell 2000 Index (NYSE:IWM) finally followed its market peers in setting a higher high this week, as IWM finally got above these highs on Tuesday. The $67.50 level was proving to be quite stubborn, but IWM managed to hold above it on the weekly close, which was an important development. This level held on a few pullbacks during the week, and will be an important area to monitor this week. A failure to hold this level could end up leading to IWM trading back towards the middle of its base near $64-65.

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Implications

Despite some sign of weakness, the markets remain above prior resistance levels and have given up very little ground over the past couple of weeks. The tech stocks are the area showing the most weakness, but this should be expected as this group led the way higher and is the most tired. The next couple of weeks will be very important as a light volume pullback could set the stage for a powerful end-of-year rally. However, October has certainly accounted for some scary market pullbacks in the past, and the recent stalling of the markets has many traders worried. Traders should monitor the recent breakout areas as any weakness that drives the major index ETFs below these levels would be a clear warning signal. If these levels hold, the benefit of the doubt would continue to lie with the bulls.




Brewers Looking Bullish

Introduction

Observation shows that one group of stocks that is running at near all-time highs, is brewers. These stocks are technically already in a bull market and many are emerging from recent bases. Any stock that was able to overcome the declines they suffered during our most recent bear market deserves some respect. The brewers were hit along with the rest of the markets, but ultimately, many of these stocks surged past their prior bull market highs several months ago. After consolidating for the past few months, these stocks are gaining momentum again and are starting to hit new highs.

Companhia de Bebidas das Americas (NYSE:ABV)

Companhia de Bebidas das Americas (NYSE:ABV) is a brewer that is hitting all-time highs. ABV has managed to rally almost $100 from its bear market lows in late 2008. It had been trading in a sideways range for the better part of a year until recently beginning to move higher. It cleared an important level near $100 in June and then broke past $110 in September. The $110 level in particular is an area to watch as a possible support area moving forward.

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Fomento Económico Mexicano, S.A.B de C.V (NYSE:FMX)

Fomento Económico Mexicano, S.A.B de C.V (NYSE:FMX) is another brewer trading near all-time highs. FMX cleared its base in late July and has been steadily rising since then. It has been hugging its 20-day moving average for several weeks as it pushes higher. The $50 level is a very important level to monitor, as this was its prior bull market high in 2008. FMX failed its first test of this level late in 2009 and then needed a few weeks to clear it in 2010. It finally managed to break out this month, which could force the hands of some short sellers.

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Boston Beer (NYSE:SAM)

Boston Beer (NYSE:SAM) is another brewer near all-time highs, although it has not yet broken out. However, SAM cleared a huge resistance level near $54-$55 back in April and after a very volatile May, it followed through with a $20 rally into June. It has since settled into a consolidation that is taking the shape of a descending triangle. A move above the $70 level would get my attention as it could set a higher high and clear the trendline marking the top of the triangle.

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Anheuser-Busch Inbev SA Sponsor (NYSE:BUD)

While Anheuser-Busch Inbev SA Sponsor (NYSE:BUD) is also at all-time highs, it should be noted that it didn’t start trading until after the financial crisis. However, after trading sideways since it began trading in September 2009 through July of this year, it finally broke out. It initially looked like BUD would fail its breakout after dipping back into its base in August, but it gapped higher in September and took off from there. It is currently extended after a second gap, but showing great relative strength to the markets. The $55 level is one area to watch for possible support on a pullback.

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Implications

While it’s likely that the general markets will need to take a breather soon after experiencing a pretty sharp one-month rally, the benefit of the doubt currently lies with the bulls. When you have an up trending market, it makes sense to look for the strongest stocks, and the brewers currently fit the bill. They have been in a bull market of their own and this trend will likely continue if the markets can continue to head higher. Even if the markets take a breather, these stocks have proved themselves over the past several weeks and may find support relatively nearby. It's likely to take a severe market correction to derail their current trends.

Conclusion

”October Fear”

"October is frequently tagged as a fearful month for investors," said Sam Stovall, chief equity strategist at S&P, in a note to clients. "One reason is because investors painted October as a 'crash' month after the Great Crash of 1929 that was reinforced by the Crash of '87."

But the perception hasn't held up. Stovall notes that since 1945 October actually has been the market's best month.

S&P, in fact, on Wednesday raised its 12-month projection for the 500 index to 1270 from 1200 due to seasonal factors and the dissipation of double-dip economic fears.

Of the three major averages, the Nasdaq tech barometer has done best during September, rising 64 percent of the time over the past 22 years, and following that up with October gains 57 percent of the time.

The Dow has fared worst, closing up only 39 percent of the time in September and then following that up with October gains in 54 percent of the time in the past 61 years.

Though the market moved sideways this past week (stocks were struggling Friday though still higher), investors seemed to have moved away-again-from double-dip fears. Now, they're back into a mindset where as long as economic numbers beat humble expectations, that's a reason to buy.

"The market always does the opposite of what everybody expects. Everybody expected the market to sell off in September and it sells of in August instead," says Keith Springer, president of Capital Financial Advisory Services in Sacramento, Calif. "The (economic) stats aren't nearly as bad as the worst case could have been. We're in a market now where as long as it's not horrible, it's pretty good."

Sentiment

Investor sentiment surveys, such as those from the American Association of Individual Investors, are showing strong bullish sentiment, with nearly 43 percent of respondents indicating they think the market will go higher.

While such surveys are often contrarian indicators that were not the case for September when optimism remained intact and so did the stock market's move higher.

"I don't think we've exhausted ourselves," says Todd Salamone, senior vice president of research at Schaeffer's Investment Research in Cincinnati. "Looking at some of the sentiment indicators over the past nine months, whether it was the options market or polls from active investment managers, they weren't anywhere near the levels that have preceded corrections. It does suggest there's firepower on the sidelines."

Money has been coming in off the sidelines at a steady pace, with $2.8 trillion parked in money market funds as of Sept. 29, according to the Investment Company Institute. That's well below the more than $4 trillion that had been out of the market during the worst of the financial crisis.

Stock allocations total 55.2 percent of investor portfolios, the highest total since April, the latest AAII numbers show.

Portfolio managers and hedge funds who missed the September rally could be tempted now to start deploying cash in hopes of playing catch-up, another factor that could continue the autumn surge. "You have a lot of professional investors and managers that are trailing their benchmarks. September just exacerbated that move," says Gary Flam, portfolio manager at Bel Air Investment Advisors in Los Angeles. "As we get closer to year-end, there definitely is a push by professional investors to chase rallies and then want to see pullbacks so they can get invested."

Yet Flam says he doesn't see strong levels of conviction either way in the market. And indeed, just four weeks ago the AAII respondents were indicating a level of bearishness not seen since just before the market found its March 2009 lows.

"At the end of the day our method of investing is longer-term," Flam says. "So we're trying to think of not necessarily what gets us to year-end but what gets us to year-end 2011. If we get that call right, because that is a bigger call, then we're going to be doing the right thing and our investors are going to be happy."

Earnings

Analysts will be parsing comments from CEOs and other corporate talking heads as their companies release quarterly results to gauge how executives see the recovery unfolding. Investors have become more optimistic over the strength of recovery in the last month as worries of a return to recession have faded.

"I'm looking for companies to say things are not falling off a cliff. They're not rapidly improving, but we're starting to see this moderate, sustainable growth," said Kurt Brunner, portfolio manager at Swarthmore Group in Philadelphia, Pennsylvania.

Some strategists expect stocks to continue their upward move until at least early November, when midterm elections are held Nov. 2 and the Fed meets Nov. 3.

"I think that given the movement in September, October is not going to see as much or as steep an upside move, but we should see upside in October," said Binky Chadha, Deutsche Bank's chief U.S. equities strategist.

Elections

He said the mid-term elections should be a positive for stocks. "The risk-reward is skewed massively to the positive side. In 19 of the last mid-term elections, 18 percent of them delivered positive results for stocks," said Chadha.

Chadha also does not think the election outcome is priced in, as some analysts believe. Nor does he think the idea of further Fed easing has moved stocks, which have benefited from the weaker dollar but also an improvement in economic data in September. "The dollar should have moved down without quantitative easing. Quantitative easing and improvement in macro data have pushed the dollar down," he said.

Quantitative Easing

"QE is one of the risks for the market because basically it's my view there has been very little confidence in the economic recovery for some time now. The lack of confidence still prevails. It's an open question how the market is going to react to the Fed," he said.

Bill Stone, chief investment strategist at PNC Wealth Management, agrees more easing may not be good for stocks, despite the belief by many traders that it has helped. "I almost worry if you get QE, that it's just a sign that the recovery is continuing to flounder and I'm not sure whether that's good for anybody...I'm not sure what I'm going to say if we get it, but I'm not hanging my hat on that as a reason to be positive about anything," he said.

Chadha said while a move to ease by the Fed might be taken negatively, the timing of the election could help the market. "I think the risk will be overwhelmed by the macro of the election," he said.

If Republicans win the House, as many expect, some analysts believe the Democratic Congress will be much less likely to impose new taxes on the wealthy or increase capital gains taxes when they consider extending the expiring Bush tax cuts after the election.

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