Stock Market Breaks as S&P 500 Tests 2,000

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Stocks surged higher on Thursday, led initially by a 10.8% post-earnings gain in payment processor Visa (V) and enthusiasm over a strong third-quarter GDP print before things got odd.

The regurgitation of a two-week hold headline out of Japan about Tokyo is preparing to increase the equity allocation in its public pension funds ignited the yen carry trade (yen weaker against the dollar) and sent the computer trading algorithms that control the stock market into overdrive.

So much so that the financial markets basically broke, with quote outages and crossed National Best Bid and Offer prices. Stocks melted up during the outage. A massive e-mini S&P 500 bid in the futures market seems to have been the catalyst, lifting the index to just below the 2000 level before the buyers drifted back.

In the end, the Dow Jones Industrial Average gained 1.3%, the S&P 500 gained 0.6%, the Nasdaq gained 0.4%, and the Russell 2000 gained 0.8%. Gold was slammed hard in the wake of Wednesday’s announcement from the Federal Reserve that it’s bringing its QE3 bond purchase program to an end. That bolstered the dollar and, somewhat counter intuitively, boosted Treasury bonds prices as yields declined.

Utility and healthcare stocks led the way at the sector level, rising 2.1% and 1.8% respectively as energy stocks dragged.

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As a result, the large cap indices have almost completely reversed the mid-October selloff and are just a hair below the record highs set in September. The Dow is less than 1% off of its peak of 17,350. And the S&P 500 is 1.2% from the record of 2,019. Small caps dropped harder and have further to run, with the Russell 2000 down 5% from its peak.

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Despite the end of the Fed’s bond buying, which has bolstered the financial markets since 2012, investors were encouraged by another solid read on the health of the economy: GDP expanded at a 3.5 percent annualized rate following a 4.6 percent annualized gain in the second quarter. This was better than the 3.0 percent consensus estimate. A better trade balance, despite the dollar’s recent strength, contributed as did a rebound in government expenditures (to the best level since the second quarter of 2009).

There are a few wrinkles worth mentioning. Despite the market’s run back to its highs, participation remains worryingly narrow. Breadth, as measured by the percentage of S&P 500 stocks in uptrends, remains within a downtrend that seems to have started back in July. Currently, only 56% of stocks are in uptrends vs. 76% in early September and nearly 85% back in July.

Moreover, investors face two big catalysts over the next week. The first will be the mid-term election on Tuesday which is expected to feature a GOP takeover of the Senate. The result will likely set the stage for a rerun of the fiscal fights seen after the 2010 midterms when the GOP took the House.

And next Friday, the October jobs report is likely to feature another drop in the unemployment rate, bringing forward expectations of Fed rate hikes and the appearance of long delayed wage inflation.

So some caution is warranted. But not non-participation. The rebound out of the mid-October lows has resulted in some nice gains, including a 122% jump in the Nov $97.50 Caterpillar (CAT) calls I recommended to Edge Pro subscribers on Oct. 21. Or the 17% gain in Pacific Biosciences (PACB) bagged by Edge subscribers since recommended last Thursday.

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Right now, new opportunities are appearing in emerging market stocks, with the Nov $41 calls in the iShares Emerging Markets (EEM) up nearly 60% since I recommended them to subscribers on Friday.

Anthony Mirhaydari is founder of the Edge and Edge Pro investment advisory newsletters, as well as Mirhaydari Capital Management, a registered investment advisory firm.


Article printed from InvestorPlace Media, https://investorplace.com/2014/10/stock-market-breaks-as-sp-500-tests-2000/.

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