The major indices experienced solid gains on the heaviest week of earnings reporting for the 3rd quarter season. The calendar featured results from Apple (AAPL), which didn’t meet the market’s high expectations and languished following its report. But, it was certainly a bullish sign for the markets that the rally extended without much participation from Apple.
For the week the small caps actually led with the IWM up over 7.6%. The Transportation index jumped 7%, Nasdaq 100 surged 6.5% & the S&P 500 gained 6%.
Most earnings news was generally met with a positive reaction, helped in large part by the significant drop in market rates. The 10-yr note yield declined 31 basis points this week to 4.51% and the 2-yr note yield fell 17 basis points this week to 4.86%. Short sellers appeared to have covered their positions, helping the sharp drop in rates.
Another important factor driving activity in the Treasury market was the FOMC meeting. The committee voted unanimously to leave the target range for the Fed funds rate unchanged at 5.25-5.50% and Fed Chair Powell’s press conference was deemed less hawkish than feared.
Now, the Fed funds futures market isn’t pricing in any more rate hikes over the next 12-month horizon; in fact, it is pricing in at least two rate cuts over the next 12 months, according to the CME FedWatch Tool.
The sharp drop in rates acted as a springboard for stocks, aided by short-covering activity and a fear of missing out on further gains in a seasonally strong period for the market. Last week brought the S&P 500 into technical correction territory, but this week’s rally brought the S&P 500 back above both its 200-day and 50-day moving averages.
The rate-sensitive real estate sector was the best performer, up 8.6%, followed by the financial (+7.4%), consumer discretionary (+7.2%), and information technology (+6.8%) sectors. The “worst” performing sector was energy, which still climbed 2.3% this week.
Looking forward, although the S&P 500 closed above its three-month declining channel top resistance with Friday’s move, it still has additional significant technical resistance near 4385 from the October 10-17 time frame. The Nasdaq 100, despite its 6 day surge, only managed to close near that resistance line and needs to extend to confirm the S&P 500 breakout on Friday.
In addition, the Transportation index (TRAN) and IWM (Small cap ETF) both closed at or very near significant overhead resistance, as well. So, next week appears to be technically quite important. Either they get a strong breakout, signaling that they are possibly embarking on a strong late 2023 rally, or the rally is halted in its tracks near key resistance at the Friday closes, and gets at least a pullback retracement of the move. We should be able to determine that shortly.
And remember, Trade what you see, not what you think!
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