-Stocks and the Dollar remain inversely correlated. 
-Short-term interest rates are edging higher and this could lift the Dollar. 
-Gold remains at high levels as the breakouts hold. 
-Broken resistance turns into support for oil.
-Bonds bounced off a key support zone.

Intermarket Overview – daily

Intermarket Overview – weekly


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US Dollar Index – daily

US Dollar Index – weekly

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Gold Continuous Futures – daily

Gold Continuous Futures – weekly

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West Texas Intermediate – daily

West Texas Intermediate – weekly

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30-year Treasury Bond – daily

30-year Treasury Bond – weekly

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The world celebrated the Dow Jones Industrial Average’s close above 10,000 level last Thursday. It took nearly a year to reclaim that important psychological level of 10,000.

The street had begun to question the strength of this market going into the next twelve months. Conservative investors are still showing doubts in the market while there are a growing number of traders and investors who believe that the recovery story is on the roll.

Conservative investors supported their argument by pointing towards the weak unemployment in the country. They also pointed out that the top line earnings still did not meet expectations. Furthermore, they cited that the regional banks are still suffering and small business could not manage to secure credit from these banks.

The other camp of investors and traders think that the recovery is already on the way. They cited that the market tends to lead the economy rather than vice versa. They also pointed to the fact that so far in quarter, companies that have reported their earnings results posted better than expected earnings. Their arguments are backed up by the fact that there are still many sidelined monies that will eventually come into the equity markets due to the weakness in the Dollar.

Looking at last week’s performance, the market had a great week with 4 out of 5 days registering gains. This great performance was fueled by the better than expected earnings results from notable companies such as JP Morgan Chase, Goldman Sachs, Intel Corp and Google Inc.

Easy Monetary policy also lent a helping hand to fuel the stock market growth for the past few weeks to months. Investors and traders will continue to do the re-inflation trade as long as the Fed maintains the easy credit policy.

The economic data was rather mixed last week. Sentiment reports such as the IBD/TIPP Economic Optimism and Michigan Consumer Sentiment shows that the reports came out worse than expected. However, the stronger than expected results from Retail Sales, Weekly Unemployment Claims and Weekly Crude Oil Inventory help to support the market.

Major Events

• California bank becomes 99th to fail in U.S. in 2009
• U.S. Dollar hit 14 months low
• Fed Chairman Bernanke hints that more stimulus package might hit the main street.

Economic Data

Investors and traders have been weighing earning results against the growth of the economy. This week, there are some important economic data that will make an impact on the market.

On Monday, the NAHB is due to post its October housing market index. Tuesday will bring in numbers from the September PPI, housing starts and building permits. On Wednesday we have the Fed Beige Book. Thursday brings weekly jobless claims and September leading indicators. Lastly on Friday, existing home sales data for September will be released.

Earnings

61 S&P 500 companies having reported earnings so far, with 79% topping analysts’ expectations, 11% having matched and only 10% have come in below expectations, according to Thomson Reuters.

So far, the earnings results have come out similar to the last quarter’s earnings with many companies beating lowered expectations.

Next week, another 75 S&P500 companies are due to report earnings along with 11 Dow components.

Among the highlights next week will be results from Apple Inc. due after the close of trading on Monday. Tuesday will bring, among others, Coca-Cola Co., Dupont, Pfizer Inc. and United Technologies Corp. Wednesday sees results from Boeing Co., Freeport McMoran, Morgan Stanley and Wells Fargo. On Thursday, results are expected from 3M Co., AT&T Inc., Credit Suisse Group, Dow Chemical Co., McDonald’s, Merck, and Travelers Cos. Microsoft Corp. are due to release its earnings on Friday.

Summary

Another week of better than expected earnings from the major companies. It has been the headline for the week as Goldman Sachs, JP Morgan Chase, Intel Corp. and Google Inc. smashed earnings records amid the slow economy.

The sentiment on the street has been surging along with the market recently. Many traders and investors seem to be comfortable in putting money into this market as it establishes itself above the psychological mark 10,000. Many of them are putting money into risky assets than holding the ever-depreciating Dollar in the near term. The correlation between the rising equity price and falling Dollar seems so obvious that even main street is shorting the Dollar to buy every other hard asset in the market.

The weakening Dollar so far has helped to boost earnings for the Conglomerates and helped the growth in exporting industries. However, the problem with a weakening Dollar will be a bigger bubble in the asset market and the loss of faith in the currency. The biggest problem of all will be Hyperinflation not too far down the road.

The coming week’s earnings results are likely to be the same as the previous week, showing better than expected grades. The market is likely to maintain its grip above the major psychological levels.

In conclusion, the market should stay higher in the coming week as long as companies post better than expected earnings results. The U.S. Dollar will be the main focus going forward. As long as the Fed maintains a loose monetary policy, the market should push higher. Any hints of dissatisfaction with the weak dollar will make the market very edgy.

Sector Rotation

Once again the Energy (3.64%) took the top spot to lead the market higher for the week followed by Industrials (2.11%), Materials (1.46%), Consumer Discretionary (1.4%), Consumer Staple (1.31%), Health Care (0.76%), Utilities (0.47%), Technology (0.43%) and Financials (-0.91%).

Same story again with the weakness in the Dollar – it continues to spur the growth in the commodities sectors such as Energy and Materials.

Financial and Technology sectors took a beating due to the “buy the rumor, sell the news” trade last week.

In conclusion, the market will continue to surge higher as long as the Dollar remains weak. The sectors that are likely to benefit from the weak Dollar will be Energy, Industrial and Materials.

Technical Analysis

The S&P500 Index closed at 1087 last week. This indicates a gain of 16 points (1.5%) from the previous week’s close.

The market had a run of 4 consecutive positive days in this week. The push on Thursday was fueled by the euphoria of getting above the 10,000 mark on the Dow Jones Industrial Average.

Technically, there are no signs of slowing down the bull after such a great run since March and July. The market had managed to close above the 50 Day Moving Average since 15th of July. Apparently, the market always seems to be able to find a buyer to bid up the price from the dip of the 50 MA level.

Looking at the daily chart, the market is going higher amid a slower pace as compared to the early stage of the bullish surge. The S&P500 Index will face a tough job to climb above the 1,200 mark for the end of this year.

Meanwhile, the street’s optimism and confidence in the market continues to push higher after the Dow Jones Industrial Average managed to establish a close above the 10,000 mark.

Many folks are likely to be more comfortable in putting their money in the market now as the fear of a double dip seems to have disappeared recently from the news. Furthermore, the media has been creating a lot of fear with regard to the depreciating value in the purchasing power of the U.S. Dollar.

Many people believe that the Dollar is going to fall further and are trying their best to safeguard their Dollar through investing in Gold, Oil, base metals and even good quality stocks.

Looking at weekly candles, the S&P500 Index is suggesting some upside movement if it can break above 1100 in the coming week. The weekly chart shows a healthy bullish candle that might translate into further gain in the coming week.

Looking at daily candles, the S&P500 Index looks like it might be starting the week slightly towards the positive side. The candle formation, a “hammer” on the rising trend tends to point toward a consolidation over the next few days.

The immediate support levels are S1: 1080, S2: 1060 and S3: 1040.
The immediate resistance levels are R1: 1100, R2: 1150 and R3: 1200.

In conclusion, the market this coming week is likely to be bullish if it can break above the 1100 level. Earnings will play a big part in deciding the fate of the market. The U.S. Dollar will also play another big part towards the growth in the equity market. Overall market sentiment remains bullish but the economic view is still bearish. Thus, the strategy in this market is go with the bullish flow but maintain a clear mind ahead of the economy situation.

It would be wise to not commit more than 50% of your cash to trading now. Buying yourself some insurance in the form of cheap Puts may not be a bad idea should the market decide that it has had enough of this bull-run.

It is October, after all.

[Conrad Alvin Lim]

Stocks Climb on Earnings, Currency Pairs Present Surprising Movements

Global equity markets soared last week, after strong earnings releases in the United States led the benchmark S&P 500 index to new highs for 2009.  The S&P 500 rose 16 points or 1.5% during the week, while the Dow Industrial index broke the psychological 10,000 level.  European indices such as the DAX and the FTSE made new highs for 2009, while Asian equity markets posted solid weeks after previously retracing from high level.

The markets started on a positive note on Monday, following the prior week’s rally in the equity markets.  The market leveled off on Tuesday prior to a wave of global economic releases and numerous earning releases from large caps. On Wednesday the markets shifted into high gear, after strong earnings numbers from Intel and JP Morgan (Tuesday evening and Wednesday morning respectively).

The markets also welcomed strong Retail sales on Wednesday which, excluding sales of autos and food sales, increased 0.5%. It was a welcome sign of consumer activity especially after one of the deepest downturns in history.  The headline number fell 1.5% in September with the end of the “cash for clunkers” program, but consumer spending rose in many categories, lifting hopes that the economic recovery is gaining momentum at the start of the holiday shopping season.

Global Economic Data Continues to Show Improvement

Also on Wednesday, Japan’s central bank held fast on interest rates, in an effort to spur lending and bolster the corporate-debt market. The ‘no change’ statement came despite recent improvement in the world’s second largest economy.  BOJ Governor Masaaki Shirakawa indicated that the central bank is still leaning towards stopping the purchasing of corporate debt as scheduled at the end of the year, though no formal decision was announced on the issue after a two-day policy board meeting.

In the United Kingdom, the number of people claiming unemployment benefits hit its highest level for more than 12 years in September, but the monthly rise was smaller than expected, hinting that the labor market may have seen the worst.  The number of people claiming Jobseeker’s Allowance benefit in September totaled 1.63 million, the highest level since April 1997, the Office for National Statistics said.

The euro zone saw its fourth straight monthly increase in industrial output in August, providing further confirmation that the region’s severe recession ended around the middle of 2009.  Industrial output in the 16 countries that have adopted the euro currency swelled 0.9% in August from July. The production data eased worries that the euro zone might slide back into contraction later this year or next, though some economists warned that growth would likely slow once government stimulus programs run their course.

The Pound Climbs Higher, USD/CAD at major Support

It was an interesting week for the sterling, climbing dramatically higher against the U.S Dollar. The Bank of England had a positive effect on the Sterling last week as Paul Fisher released an optimistic view on the UK’s situation, sending the GBP/USD six big figures higher for the week. Fisher said that the central bank may pause in its QE (quantitative easing) program and mentioned that he has confidence that the program is working as hoped. This came after a positive surprise in the jobless numbers. Even though the fundamentals for the pound are still negative, with interest rate differentials favoring other currencies, investors preferred the undervalued currency driving it up for the week. Next week’s Bank of England’s minute may ruin the party as analysts are expecting the bank to lay low for the moment and let its recent policy leak through the system.

From a technical point of view the GBP/USD bounced off trend line support and has now headed into range. Even though a minor trend line lies ahead, one could expect consolidation on this pair around current levels.

Similar to the British pound, the Japanese yen reversed during the course of last week.  The BoJ’s upgrade of the economy this week (the government assessment was more pessimistic) does not alter the view that BoJ rates will remain extremely accommodative for an extended period making the yen a primary funding currency.  The USD/JPY broke above its downtrend line (around ¥89.90) drawn off the dollar’s Aug peak, after establishing a base around ¥88.00 causing the 5 and 20 day moving averages to cross to the upside.  Yen losses are likely to shake out momentum traders that took advantage of the yen’s August and September rally.  With the yen uptrend abating, momentum traders, who pay to be long yen against higher yielding currencies, are likely to trim positions triggering further yen losses.  A break above ¥91.70 could present a long position to ¥92.90.

The Bank of Canada is scheduled to meet this week and is expected to stick to its previous statement; leaving rates unchanged thru mid-2010.  Concerns about C$ strength are unlikely to lead to an intervention, especially given limited potential for intervention success. Even though the chart is trading on weekly support, further Dollar weakness together with rising oil prices could lead this pair lower in the long term, to test support level 2.

The Week Ahead

Economic data will continue to have an effect on the intraday sessions this week. In the U.S the market will be watching construction output in the EMU and US NAHB housing index, two events that could cause movement.  Tuesday will also be an interesting day as the Bank of Canada will announce their interest rate decision.  With Australia paving the way, recently raising rates, the markets could be in for a surprise.

Furthermore, the second half of the week should be exiting as the US beige book, UK retail sales and Canadian retail sales are all expected to be released.  Friday’s session will be influenced by the big man’s comments (Ben Bernanke), mentioning the Fed’s outlook.