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Market Outlook
The Week Beginning Monday,
September 27, 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



upand 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 –

  • There are no major economic reports scheduled for Monday.

Tuesday –

  • The Case-Shiller home price index for July and

  • The Conference Board's Consumer Confidence Index for September.

Wednesday –

  • Weekly report on U.S. petroleum supplies

Thursday –

  • Weekly initial jobless claims,

  • Chicago purchasing managers' index, and

  • Second-quarter gross domestic product.

Friday –

  • August construction spending,

  • personal income and spending,

  • September auto sales,

  • Consumer sentiment in September,

  • September manufacturing index.



This Week’s Major Earnings Reports

earnings

Monday –

  • Cal-Maine Foods Inc. (CALM),

  • Jabil Circuit Inc. (JBL), and

  • Paychex Inc. (PAYX)

Tuesday –

  • Walgreen Company (WAG) and

  • Sealy Corporation (ZZ)

Wednesday –

  • Actuant Corp. (ATU),

  • American Greetings Corp. (AM), and

  • Family Dollar Stores Inc. (FDO).

Thursday –

  • Accenture Plc (ACN) and

  • McCormick & Company, Inc. (MKC)

Friday –

  • There are no earnings reports scheduled for Friday.


week ahead

Outlook for This Week

Stocks broke out of their summertime trading range, and the question now is whether the market can hold on to September's record-setting gains.

With the past week's 2.4 percent gain, the Dow Jones Industrial Average is now up 8.44 percent for the month and is on track for its best September since 1939. The Dow, at 10,860, is up 11.1 percent so far for the third quarter, which ends Thursday. The S&P 500, up 9.5 percent in September, closed above the tough, 1130 resistance level twice in the past week, a signal to some traders that the market may be set to trade in a new higher range, a technical breakout that analysts said suggested further gains were likely.

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If the rally holds, it would make September the best month for the S&P 500 since at least March 2000, and the best September for stocks since 1939, according to Reuters' data.

"Sentiment has turned sharply higher over the past few weeks after very bearish readings last month," said Michael Sheldon, chief market strategist at RDM Financial, in Westport, Connecticut.

U.S. stock investors will head into this week wondering if September will end as strongly as it began for the market, with manufacturing and personal income data among the top indicators on tap.

The data will be watched for further clues on whether the economic recovery is still on track and to see if the market's recent rally has support.

Friday's advance left the three major U.S. stock indexes with gains for the fourth week in a row, boosting investors' confidence that the upward move will continue.

"Ultimately, the big deal is going to be whether the economic growth rate is really accelerating in the fourth quarter or whether it doesn't," said James Paulsen, chief strategist at Wells Capital Management. "In the short run, these technical levels matter. There's no way to get to 1200 unless you break through what's been the overhead resistance to the trading range since May."

"If I'm worried about anything I am worried a little about the earnings season, only because you had a weak quarter...I'm watching the GDP revisions leading up to the earnings reports. If people are revising down their growth, you generally get a disappointing earnings season. If they're revising up, that's a good sign," he said.

There is a smattering of data in the coming week, including ISM manufacturing data, consumer sentiment readings and monthly auto sales.

Economists are watching the personal consumption expenditure data on Friday, since it is a gauge the Fed looks at as a measure of inflation.

The Fed, in the past week, was the biggest driver of markets, after it promised it would move on quantitative easing, or QE, if the economy warrants it.

The dollar went into a tail spin, losing 3.4 percent against the euro and nearly 2 percent against the yen. For the week, Treasurys were slightly higher, with the 10-year yielding 2.610 percent.

Gold rose 1.6 percent to a record $1,296 per troy ounce, and silver jumped 2.9 percent to $21.38 per ounce, a 30-year high. Oil rose 2.1 percent to $76.49 per barrel as the Fed's comments sent buyers into commodities. Some economists believe the Fed will use its Nov. 3 meeting to announce QE, which would likely be the purchase of a significant amount of Treasury securities by the Fed in an effort to push lending rates even lower.

Some of the economic data also was a bit better than expected in the past week, including Friday's durable goods, which had been disappointing last month. "It was the report that hit forecasting the hardest. Now everybody's wiping their foreheads," said Credit Suisse economist Jonathan Basile.

Basile said the durable goods report, which showed a 1.3 percent decline in August, was actually better than expected because it showed core capital goods orders gained 4.1 percent. "Firms went from major destocking to a little restocking. Then they went to understocked, to just about right," he said.

Expectations for this Week

Optimism In The Market Place

Introduction

Optimism in the market at present is quite rampant which could leave us vulnerable to a setback. As sentiment analysis is a major key dimension to market-timing approach, it is important to be aware of influences affecting this area. A look at a great many articles and interviews during the past week have suggested the market is vulnerable because optimism is at extremes. To understand the effects on this week’s trading in regard to this optimistic dilemma, there is a need to revisit last week's market action.

Recap of Last Week

In the first trading session last week, the S&P 500 Index (SPX) pushed above resistance at the 1,130 level, breaking above a four-month trading range and completing a bullish inverse "head and shoulders" pattern. A three-day pullback to the 1,120 area, site of the 50% retracement of the 2007 peak and 2009 low, quickly followed. But by Friday morning, the bulls were back in control, with the SPX exploding above the 1,130 level on the heels of a better-than-expected durable goods orders report and a narrower-than-expected loss from homebuilder KB Home (KBH).

Another note of interest is that the SPX closed the week above 1,140, site of the 61.8% retracement of the April peak and July low. But the January high at 1,150 lingers just above.

mo4-092410



Ahead of the breakout, a host of analysts claimed that there was too much optimism in the market, leaving them doubtful about an imminent breakout. Certainly, this is where assessing sentiment gets tricky – do you put these analysts in the bearish camp if they are warning investors about too much optimism?

For example, the weekly American Association of Individual Investors' (AAII) poll seemed to grab the attention of many market watchers. After all, going into last week's trading, the percentage of bulls in this survey had moved to 50%, from a low of 21% in late August. The bullish percentage reading hit our radar too, and is certainly a risk worth noting.

But we put more weight on option indicators suggesting that underweight institutional money is stepping into the stock market after a long absence. Given that market advances in 2009 and 2010 were driven by short covering and/or institutional purchases, suggests that the significance of institutional money returning to stocks trumps that of the sentiment expressed in an AAII survey. By the way, in the latest AAII poll, the bullish percentage dropped to 45%. This suggests a bullish inverse "head and shoulders" breakout in the SPX which is accompanied by a drop in the percentage bullish, with less than half of those surveyed claiming they are bullish.

Going into the last trading week of September, the analysis of option activity on major exchange-traded funds suggests hedged buyers are still in accumulation mode. In other words, put buying relative to call buying continues to be relatively healthy amid a market rally.

Therefore, is optimism amid the SPX's breakout at an extreme?

First, on a subjective note, we do not see or hear the technician crowd getting vocal about the bullish implications of the inverse "head and shoulders" breakout pattern. This might be an indication that there is caution, or even downright pessimism among these folks, over whether the rally has staying power. Remember, when the bearish "head and shoulders" pattern developed weeks ago, we were continuously hit over the head with warnings of an impending decline.

On a more quantitative note, take a look at the historical data from the National Association of Active Investment Managers (NAAIM) survey in the chart below. (Here is how NAAIM describes itself on its website: "NAAIM member firms who are active money managers are asked each week to provide a number which represents their overall equity exposure at the market close on a specific day of the week, currently Wednesdays... Responses are tallied and averaged to provide the average long (or short) position of all NAAIM managers, as a group.")

Per the chart below, the black and blue lines represent the average exposure of this group. The higher their exposure, the more optimism there is among these investors. At present, sentiment is nowhere near the optimistic extremes that existed at the beginning of 2010 or in the April/May 2010 period. Perhaps the two major corrections this year have created a little bit of hesitancy among this group. The major takeaway here is that optimism among this group is nowhere near an optimistic extreme, suggesting there is still sideline money to power stocks higher.

mo5-092410



Another tool used to measure sentiment is the 10-day average of the all-equity, buy-to-open put/call volume ratio on the International Securities Exchange and Chicago Board Options Exchange. The lower this ratio, the more optimism there is among equity option players. As you can see on the chart below, the ratio is nowhere near the levels that have represented optimistic extremes in 2010.

mo6-092410



Conclusion

Obviously there is still plenty of ammunition to support a rally, suggesting warnings of too much optimism could be overblown. The wild card is whether hedged buyers will continue to deploy their cash into the market, based on fear of missing a year-end rally after the SPX's breakout above 1,130.

Support on the SPX is 1,130, while potential overhead resistance resides at 1,166, the index's close the day prior to the May 6 "flash crash." Despite warnings over an overly enthusiastic investing crowd, it seems there is sideline power to drive stocks higher. At the same time, keep in mind that "anything can happen," so use cheap index puts to hedge your long positions.

Corporate Bonds

About $20 billion in investment grade corporate bonds were issued in the past week, bringing the monthly total to about $88.8 billion, according to Thomson Reuters IFR. For the quarter, about $217.4 billion has been issued and $535.2 billion for the year-to-date.

Another $20 billion is expected in the week ahead, according to Lisa Coleman, head of the investment grade corporate credit team at JPMorgan Asset Management.

Coleman pointed to an interesting trend in corporate credit. Investors are snapping up investment grade debt at a seemingly faster rate than it is coming to market. "If we had about $450-$460 billion, between maturities and tenders, net supply was looking more like $90 billion. Then if you had also taken into account what's going on with coupon flow, we're actually in a net negative supply situation for the U.S. this year," she said.

At the same time, corporate bonds have become a highly desirable asset class and have seen inflows of about $100 billion into investment grade this year.

"It means we have incredibly positive technicals. The supply demand picture is positive," Coleman said. She also said the weaker economy is not a problem for corporate bond investors.

"A slow growth environment is actually pretty good for investment grade corporates because it keeps them from doing things that are too shareholder friendly and that's what we want to see as bondholders. Most of these companies have room to increase their dividends and buy back some shares," she said.

She said the $4.75 billion 3-year issue from Microsoft [MSFT) this past week was interesting. "They issued at 25 basis points over Treasurys. The coupon is less than 1 percent. Here's the better part—not only did they issue at those levels but the bond spreads over Treasurys have tightened since the issuance," she said.

The Microsoft debt offer also highlights an interesting issue. The company has a huge cash hoard and like many other U.S. companies, it keeps cash expatriated because of high U.S. taxes. At the same time, it can easily tap the debt markets for extremely low cost capital. In Microsoft's case, it raised capital it planned to use to pay dividends.

Corporations have been looking for tax relief from the government to repatriate that cash, which totals more than $1 trillion.

Economic News

S&P/Case-Shiller Home Price Index

S&P/Case-Shiller Home Price Index is due Tuesday. This measures home-price trends in 20 markets. Nomura Securities sees prices rising 2.5%, despite continued weakness in sales. But don't look for gains in the months ahead.

Consumer Confidence Index

Consumer Confidence Index is due Tuesday from The Conference Board. IHS Global Insight believes the battering the economy took in July and August will push confidence to 50.

Gross Domestic Product

Gross domestic product, due Thursday from the Commerce Department. This is the last estimate for GDP for the second quarter, and it's expected to be a touch stronger. But it will still indicate that the U.S. economy is only growing at a 1.5% to 2% annual rate.

Initial Jobless Claims

Initial jobless claims is due Thursday from the Labor Department. This will probably be around 465,000, the level reported for the week ended Sept. 18. A drop could boost the market. A deterioration could well unleash a wave of selling.

Chicago Purchasing Managers Index

Chicago Purchasing Managers Index is due Thursday. This closely watched report measures manufacturing activity in the Midwest and fell in August. Nomura sees another decline but not nearly as large as the August decline.

August Auto Sales

August auto sales is due Friday from major manufacturers. Look for sales to run at an a Auto research firm Edmunds.com predicted September U.S. new-vehicle sales would come in at an annual rate of 11.47 million vehicles, compared with 11.44 million in August. Total sales are projected to be up 28% from a year ago, as purchases slumped last year after the cash-for-clunkers program concluded, Edmunds said this week.

Institute for Supply Management Manufacturing Index

Institute for Supply Management Manufacturing Index for August is due Friday. This will show continued -- but slowing -- growth. A bullish report will definitely move markets.

The last ISM manufacturing report "helped propel the markets higher," Michael Sheldon, chief market strategist at RDM Financial, in Westport, Connecticut, said, so "any disappointment could be a setback" for stocks.

Tepid demand amid a U.S. unemployment rate of 9.6 percent is expected to have caused a slowdown in manufacturing activity in September. The Institute for Supply Management's manufacturing index probably dropped to 54.5 in September from 56.3 in August, according to a Reuters poll of economists. A reading above 50 indicates expansion.

Personal Income and Spending

Personal income and spending, due Friday from the Commerce Department. This should improve in part because of some growth in wages and salaries and a boost from unemployment benefits.

Overseas Economic News

• Chinese purchasing managers' data Wednesday and Friday and the August leading index early in the week.

• The Japanese Tankan survey is released on Wednesday.

• European finance ministers meet at the beginning and European Central Bank President Jean-Claude Trichet is expected to speak.

Other Events of Importance

Among the significant events this week are:-

• The first meeting of the Financial Stability Oversight Committee on Friday. That group is headed by Treasury Secretary Tim Geithner, and includes Fed Chairman Ben Bernanke; Securities and Exchange Commission Chair Mary Schapiro; FDIC Chair Sheila Bair, and Commodities Futures Trading Commission Chairman Gary Gensler, among others.

• The FDIC also has an open board meeting Monday. Its agenda includes discussion of how, under new financial regulatory rules, a large financial firm could be liquidated if it is a risk to the system.

• Federal Reserve Chairman Ben Bernanke is scheduled to testify about the new financial regulation law before the Senate Banking Committee on Thursday. He will discuss implementation of the Dodd-Frank financial revamp law, which took effect in July. The law gave the Fed a host of new responsibilities, including enhanced power to regulate big financial firms.

• Bernanke also speaks on Thursday at a town hall meeting with educators in Washington. Other Fed speakers include Atlanta Fed president Dennis Lockhart on Tuesday' Minneapolis Fed President Narayana Kocherlakota; Philadelphia Fed President Charles Plosser, and Boston Fed President Eric Rosengren, all speak Wednesday.

• The New York Fed's William Dudley speaks Friday morning at a journalism conference, and,

• Dallas Fed President Richard Fischer speaks Friday on the economy.

COMPANY NEWS

This Week’s Earnings Expectations

This will be a quiet week for earnings as the third-quarter earnings season doesn't get started until mid-October. So, the number of reports is modest.

Monday

Payroll processor Paychex (PAYX) and circuit-board maker Jabil Circuit (JABL) . The latter will offer a glimpse of where technology is headed.

Tuesday

Mattress-maker Sealy (ZZ) and drugstore chain Walgreen (WAG) . Sealy's fortunes are directly tied to housing.

Walgreen Co. (WAG), the nation's largest drugstore chain, is among the companies reporting quarterly results this week. Walgreen, which reports Tuesday, earlier this month posted a 2.1% rise in August same-store sales, the third straight monthly increase, and said it will exchange most of its long-term-care pharmacy business for substantially all of Omnicare Inc.'s home-infusion operations.

Wednesday

Discount retailer Family Dollar (FDO). The company will offer a picture of consumer intentions.

Thursday

Consulting firm Accenture (ACN) and spice-maker McCormick (MKC). McCormick has been a steady performer this year; shares are up 15.5%. It boosted guidance in June.

IPO’s

Hewlett-Packard (HPQ) will hold an analyst meeting on Tuesday. Shares were higher on Friday after analysts at Barclay's predicted the company will boost its earnings guidance for fiscal 2011. It could be an opportunity to announce who will succeed Mark Hurd as CEO.

SciQuest (SQI)

Initial public offerings will get a lot of attention after software maker SciQuest (SQI) raised $57 million at $9.50 a share in an IPO on Thursday. Shares closed Friday at $12.27, up 29%.

Among IPOs expected this week are:

Amyris (expected ticker symbol AMRS), a biotech company that makes yeasts used in specialty chemicals;

Campus Crest Communities (CCG), a real-estate investment trust that specializes in high-end student housing;

Elster Group (ELT), a German maker of electric, gas and water meters; and

China Wing Yang Wind Power Group (MY). The company is China's largest privately owned wind-turbine maker.

Other Company News

Dollar Thrifty Automotive Group Inc.'s (DTG) shareholders will vote Thursday on Hertz Global Holdings Inc.'s (HTZ) $1.5 billion takeover offer. And votes at Barnes & Noble Inc.'s (BKS) annual meeting Tuesday are likely to determine the fate of the nation's largest bookstore chain.

Research In Motion Ltd. (NASDAQ:RIMM) is widely expected to unveil a tablet computer, as well as the underlying operating system that will power it, at its Blackberry developer conference, known as DEVCON. The operating system is expected to come from QNX Software Systems, which RIM acquired earlier this year.

Johnson & Johnson (JNJ) chief executive William Weldon will testify before a House panel Thursday about the drug maker's handling of its massive recalls of over-the-counter medicines, including Tylenol and Motrin.

INDICATORS AND MARKET CONDITIONS

A Run of Consecutive Positive Days

Introduction

The S&P 500 Index (SPX) went almost a whole month without back-to-back down days. That streak, which spanned 19 trading days, ended on Wednesday last week. That was the third longest streak this year. In April, another streak ended at 21 days, and in January a streak ended at 28 days. The end of those streaks, which I marked on the SPX chart below, foreshadowed some pretty significant market pullbacks.

mo1-092410



More Bad News

The chart above shows pullbacks at the end of the streaks, but it's only two data points. By observing data as far back as 1990 we can see a pattern emerge. The first table summarizes SPX returns after it goes at least 19 trading days without consecutive down days. We see it has happened 23 other times since then. The data is not very promising for the next month. In those 23 occurrences, the SPX was positive less than half the time one month later, and averaged no gain. The results were even more bearish in the shorter term (two weeks). However, when you look two months after a signal, you see the market outperforms when compared to the typical returns in the bottom table.

mo2-092410



Finally, looking at each individual result since 2000, you can notice during the most recent streak, the SPX was up 8.36%. That's the biggest return during a streak since 2000 -- which is actually more bad news. The more the market gains during the streak, the more overbought it seems to be.

Implications

Looking at the one-month returns in the table below, when the SPX gained at least 4% during the streak, five of six are negative, averaging a loss of 6.8%. If the returns during the streak are up less than 4%, then four of five are positive, averaging a gain of 0.89%. The big returns are historically a bad sign.

mo3-092410



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

Tracking of SPY, DIA, IWM and QQQQ

Introduction

The markets bolted out of the gate on Monday last week as stocks cleared the week's before very tight trading range in an impressive move higher. However, they then began a three-day slide back into last week's range after the Fed hinted at more easing in a statement on Tuesday. The move was starting to look ominous for the bulls until a sharp gap higher on Friday sparked a rally to new highs for most of the market indexes. While the intraweek volatility threatened to derail the recent breakout, in the end, support levels held and the markets pushed higher. This small pullback has now created an important level to watch in the immediate future.

In the case of the S&P 500, as represented by the S&P 500 SPDRS (NYSE:SPY) ETF, last week's pullback occurred at a very important level. The $113 level was acting as stiff resistance prior to this week’s breakout, and should have turned to support once it had been cleared. But despite a one-day drop under this level on Thursday, SPY was quickly pushed higher and respected this area as support. The low that was formed near $112 on the week’s pullback should now be watched. Any drop under this level could mean a breakout failure. The next level of resistance on the upside is the highs set in May, followed ultimately by this year's highs just above $122.

spy092410



The Diamonds Trust, Series 1 (NYSE:DIA) ETF, which tracks the Dow Jones Industrial Average, also experienced a pullback to test support near last week’s breakout area. At this point, an objective view of DIA would have to state that it cleared a resistance level, set a higher high and then held the breakout area on its first test. This implies that the breakout is valid and ultimately, only a break under the week's low will negate that notion.

dia092410



Tech stocks, as represented by the Powershares QQQ ETF (Nasdaq:QQQQ), continued to assert their leadership role last week as QQQQ powered through resistance levels just under $49 and then continued higher by the end of the week. The vertical trend in QQQQ over the past few weeks has been surprising and is becoming extended. The week's low is an area to watch, but the $47 level is also an area that should usher in buyers on weakness. Looking higher, the $50 level is within reach; a break above it would surely make things interesting.

qqqq092410



While tech stocks are leading, the small caps, as represented by the iShares Russell 2000 Index (NYSE:IWM), continue to lag. IWM remains under its July highs, and also failed to rally past Monday’s highs after last week’s pullback. However, the picture is completely bearish as IWM survived an important test of the 200-day moving average last week and appears poised to clear its base soon. All eyes will be on the $67.50 level this week; a move above this level could kick the current rally into another gear.

iwm092410



Implications

It typically takes a few days for the markets to digest the Fed Statement and despite the initial weakness; it looks like the markets are poised for further upside. The test of the breakout level was an important one technically, and has now created an important level to key off of in the near term. The possibility exists that IWM will fail another test of resistance and bring the markets down with it, but at least there is a clear level to watch for short-term traders. Any close below last week’s lows would certainly be worth noting, as this level should hold if this breakout is valid. In the end though, last week’s price action was very positive as the markets held above their breakout levels. As long as these levels hold, the bulls deserve the benefit of the doubt.



Restaurant Stocks Under Pressure

Introduction

Restaurant stocks have been one of the strongest groups over the past year as stocks like McDonald’s (NYSE:MCD), Yum! Brands (NYSE:YUM) and Chipotle Mexican Grill (NYSE:CMG) have moved to all-time highs. There was a real fear that many restaurant stocks would suffer through the recession and while many names are trading much lower, as a whole this sector has been trending higher for almost two years. But despite this group's strength, it doesn't really garner the same level of attention from the media that other market leaders receive.

Chipotle Mexican Grill (NYSE:CMG)

Chipotle Mexican Grill, for example, has proved to be a clear market leader. CMG had been in a consolidation through most of the summer, while the markets were threatening to break down. CMG then broke out of its base well ahead of the markets in September, and is now building a flag above its breakout area. Whether CMG can clear this flag now or not, it is clear that it is one of the strongest stocks in the market right now.

cmg092110



BJ's Restaurants (Nasdaq:BJRI)

While many traders may be aware of CMG and its strength, other restaurant stocks like BJ's Restaurants have also been performing well. While many of these are not already above their bases like CMG, they are building flags after clearing important resistance levels. BJRI has been building a base since April and recently cleared some resistance levels near $26. While the base for BJRI is not perfectly defined, there is a clear level of resistance just under $28. BJRI is currently flagging just under this level; a move above the flag could lead to a break above the entire base.

bjri092110



Cracker Barrel Old Country Store (Nasdaq:CBRL)

Cracker Barrel Old Country Store is another restaurant stock building a flag just under key resistance levels. CBRL was trading in a well-defined channel over the past few months until recently breaking out of that range. It has begun to flag in the $50-$51 level. A breakout from the flag could lead to a break above the more important resistance level of $53.

cbrl092110



Darden Restaurants (NYSE:DRI)

Darden Restaurants also recently cleared resistance as it broke above the neckline of an inverse head and shoulders it has been building since May. DRI was able to clear pretty significant resistance around $44-$45 and is now flagging at that level. DRI’s prior high was just above $48; a move above the flag should lead to at least a retest of this level.

dri092110

Implications

Other stocks in this sector, such as DineEquity (NYSE:DIN) and Krispy Kreme Doughnuts (NYSE:KKD), are also showing similar flag patterns. Because institutions often accumulate a basket of stocks in a specific sector, traders should always be on alert when a pattern is found across multiple stocks. The bull flag is a bullish continuation pattern, and these stocks are all building this pattern after clearing important resistance levels. While not all flags are resolved to the upside, traders should be on high alert as this pattern often results in a sharp move once it is cleared.

Conclusion

September Explosion

September's strong market performance was a surprise to many strategists who had expected the usually tough month to be turbulent on the downside. The question this week is whether fund managers will sell to capture their September and third quarter gains, or ride it out into October.

"Our target has been 1100 to 1140 (on the S&P), which would be a pretty flat market," said Scott Wren, of Wells Fargo Advisers. "I think you're in for a period of the stock market working its way higher but at a very modest pace. I think you're going to see a lot of volatility between now and the end of the year, but it wouldn't surprise me to see a pull back here. We're a little cautious in the near term."

Brian Dolan, strategist with Forex.com, said the final days of September could bring an even weaker dollar.

"It's month-end. It's quarter-end, and it's going to get a little bit sloppy here. In terms of those kind of flows, in terms of the gains we've seen in U.S. shares, there's probably going to be a need for greater selling on the month end date. It'll probably lead up into that. Certainly the dollar is on its heels at the moment. It's not going to take much to push that," he said.

"We're at some major market levels...1150 in the S&P, $1.35 in the euro and it was $1,300 for gold. We need to surpass those levels to see further immediate gains. There is the risk of some consolidation in the next week," he said.

In the Treasury market, traders are watching the auction of $100 billion in 2-year, 5-year and 7-year notes Tuesday through Thursday.

It may not be a big week for earnings. But the economic reports will be very important, especially the weekly report on initial jobless claims and the Chicago Purchasing Managers report on manufacturing, both on Thursday. Decent reports, coupled with the end of both September and the third quarter, could give stocks a boost.

The past week was a surprising winner, the fourth straight week of gains. The Standard & Poor's 500 Index (SPX) surged above major resistance at 1,130 and ended the week at 1,149. That forced many traders to be buyers even if they're skeptical about the markets.

The Dow Jones industrials (INDU) had two rallies of more than 145 points during the week and rose 2.4%. The Nasdaq Composite Index (COMPX) had the best week of the major averages, rising 2.8%.

Plus, Amazon.com (AMZN), Apple (AAPL), Autozone (AZO), Nike (NKE) and Cummins (CMI) hit new intraday highs.

So, the September rally continued. In fact, it gained strength.

If the major indexes just break even this week, the Dow, up 8.4% this month, and S&P 500, up 9.5%, will have their best Septembers since 1939. The Nasdaq, sporting a 12.6% gain, will enjoy its best September performance since 1998.

And remember: September historically is the worst month for stocks.

There will be a lot of attention paid to Apple, whose shares ended the week at $292.32 and could push over $300.

In addition, gold topped $1,300 an ounce during the day on Friday but finished under that level. Watch to see if the metal can close above $1,300.

Apple is up 38.7% this year; gold is up 18.4%.

If the dollar continues to drop, you can expect higher commodity prices. Wheat finished Friday at $7.20 a bushel and is up 33% this year.

The SPX

The S&P 500's move above 1,130 last week let the broad index break out of its recent trading range.

Technical analysts are watching 1,173 as the S&P 500's next level of resistance. That level represents the high following the May 6 flash crash. Another level to watch is 1,220, the S&P 500's high for this year.

"What's so important about moving above a trading range is it signals a willingness to buy at higher prices. That type of evidence is supportive of further upside,"said Chris Burba, short-term market technician at Standard & Poor's in New York.

But "after such a huge run since late August, the odds of taking a breather here are increasing," he said.

Options

This coming week also marks the end of the third quarter and options analysts expect fund managers to try to pick up some of the quarter's better performers.

"A lot of option traders are anticipating window dressing, which is helping the winners of the last quarter, specifically Apple Inc (AAPL), Netflix (NFLX), Amazon,com (AMZN) and some material names, such as Freeport McMoRan (FCX) and Vale (VALE)," said Steve Claussen, chief investment strategist at online brokerage OptionsHouse LLC in Chicago.

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