Market Direction Mid Week Update©

Market Direction: BEARISH alert issued 10/11/2018

The BEARISH alert is 3 weeks and counting. Don't fight the tape?

Stocks climbed Wednesday to close out an ugly October on a positive note as solid earnings from high-profile brands cheered investors and revived strong buying interest in equities.

However, main benchmarks were not able to avoid recording sizeable losses for the month, leaving doubt as to whether the rally heralded a more permanent attitude in the market or if it was more of a short-term reaction to decent quarterly results.

Read: After a 673-point, 2-day surge for the Dow, is the worst over for the stock market?

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How did benchmarks fare?

The Dow Jones Industrial Average DJIA, +0.97% gained 241.12 points, or 1%, to 25,115.76, the first time for the blue chip index to finish above 25,000 since Oct. 23.

The S&P 500 index SPX, +1.09% advanced 29.05 points, or 1.1%, to 2,711.68, climbing for two days in a row, something it had not done since its three-day winning streak that ended on Sept. 20.

The Nasdaq Composite Index COMP, +2.01% rose 144.25 points, or 2%, to 7,305.90.

For October, the S&P 500 shed 6.9% for its biggest monthly decline since September 2011, while the Dow dropped 5.1% in its biggest monthly percentage fall since January 2016. The tech-heavy Nasdaq was the worst-performing major benchmark, dropping 9.2% in October for the biggest fall since November 2008.

What drove the market?

Facebook’s quarterly results may have provided some optimism after the social-media giant delivered a report that wasn’t as scary as Wall Street feared. That is notable because so-called FAANG names, an acronym of technology and internet-related stocks, among which Facebook is a member, have been at the heart of stock gains over the past 18 months. The other members of the group include Amazon.com Inc., Netflix Inc., Apple Inc., and Google-parent Alphabet Inc., which have all seen their shares bludgeoned over the past few weeks amid doubts about the ability of these companies to consistently produce earnings growth, while managing user security.

Stock markets globally were also bouncing back, signaling a pivot from a risk-off mode that had gripped much of the investing world during a volatile month that has left the Nasdaq in correction territory, defined as a drop of at least 10% from a recent peak, with the Dow and S&P 500 points, at one point, flirting with tumbling into correction for the second time in 2018.

Fears of trade wars, a policy misstep by the Federal Reserve as the central bank attempts to normalize monetary policy from crisis-era levels and worries about contracting growth outside of the U.S. have been key elements of a erosion of confidence among investors.

The Bank of Japan kept its ultra-easy monetary policy in place as concerns grow about the impact of U.S.-China trade tensions on the Japanese economy, but did warn of the adverse impact of protectionism and the U.K.’s efforts to exit from the European Union on global markets and economies.

Meanwhile, China’s manufacturing and services PMI data for October showed the slowest growth in activity in over two years, coming in at 50.2 from 50.8 in September, according to data released by the National Bureau of Statistics. A reading of at least 50 indicates improving conditions. The report provides further evidence of a slowdown in the world’s second-largest economy.

What data were in focus?

Private-sector employers added 227,000 new jobs in October, according to payroll firm Automatic Data Processing, above expectations for 202,000 new jobs.

Labor costs rose 0.8% in the third quarter, according to the Labor Department’s employment cost index report, topping the consensus forecast for a 0.7% jump. Year-over-year, compensation growth remained at the 2.8% level seen in the second quarter, a 10-year high.

Chicago-area PMI came in at 58.4, down from 60.4 and below the consensus estimate of 60.0, according to FactSet. While a reading above 50 indicates expanding activity, this was the lowest reading of the index since April.

What were analysts saying?

“We’ve been trading on things that aren’t fundamental in nature, and now we’re back to looking at the fundamentals, which are very attractive,” Brent Schutte, chief investment strategist at Northwestern Mutual Wealth Management Company, told MarketWatch.

Schutte pointed to Wednesday’s employment-cost index release as evidence that wage growth is accelerating while inflation remains moderate. “We’re hiring more people and we’re paying them more, and that’s great news for the economy,” he said.

Tom Essaye, president of the Sevens Report, said in a note to clients that recent gains show that the “shock of last week’s earnings disappointment is behind us,” and that investors are realizing the market is undersold.

“For now, we remain in the bottoming process, although barring any deterioration in the [macro outlook], I don’t expect a continued waterfall decline,” he said.

How were other markets trading?

Asian markets finished the day higher, with the Nikkei NIK, -0.78%  up more than 2% and European stocks are also rose.

Oil futures CLZ8, -0.29% were weaker, while gold prices GCZ8, +0.29% settled lower, and the ICE dollar index DXY, -0.25% traded mostly flat.

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The all-time lows since our initial recommendation to go SHORT this market. Here is how the markets have performed:

Stock Market Direction Recommendation (10/11/2018)
Dow	down 930.60 points a 3.71% gain	10/29/18
Nasdaq	down 406.23 points a 5.54% gain	10/29/18
S&P 500	down 124.83 points a 4.58% gain	10/29/18

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