The market positively reversed for the second straight week (opened lower and closed higher) after the geniuses in D.C. agreed to a last minute deal to kick the can down the road a few more months. As we have mentioned several times this year, we are in a very strong bull market and pullbacks should be bought, not sold. This latest pullback was just another shallow pullback in both size (% decline) and scope (weeks, not months). The primary catalyst behind this 4.5 year bull market remains easy money from global central banks. We know that the easy money is here to stay (for now). Therefore, barring some unforeseen massive decline, this bull market is alive a well. Eventually the music will end, but as a market practitioner, our only job is to align ourselves with what is actually happening, not what someone thinks will happen. That said, weakness should be bought until intermediate and longer-term technical levels are broken. The market remains very news-driven which is an unfortunate reality right now.

MONDAY-WEDNESDAY’S ACTION: Deal Reached in D.C.

Stocks opened lower on Monday but closed higher as optimism spread regarding a debt deal in DC. The small-cap Russell 2000 hit a new all-time high which bodes well for the broader averages. The DJIA and SPX enjoyed a four day win streak as Wall Street welcomed signs of progress from DC. Christine Lagarde, head of The International Monetary Fund (IMF), said the situation in DC was “very, very concerning” and warned that “creative accounting” was not the right solution. S&P 500 companies are expected to post earnings growth of +4.2% in Q3, down from the +8.5% rate that had been forecast on July 1.
Stocks fell on Tuesday as the geniuses in DC continued to stall before reaching a deal on the debt debacle and reopening the government. Before Tuesday’s open, two legendary hedge fund managers, Leon Cooperman and David Tepper, presented their bullish cases for stocks. They agreed that stocks still had room to rally if cooler heads prevail in DC due to their multiples. Their argument is that most bull markets do not end until the P/E on the S&P 500 hits the high teens or low 20’s, we are still hovering near 14/15x next years earnings. That’s why they believe there is still more room for stocks to run.
Stocks soared on Wednesday after the Senate said a bipartisan deal will get done and the US will not default. Senate Majority Leader Harry Reid and Republican leader Mitch McConnell announced the agreement in the middle of the day. Almost immediately, Republican critic, Senator Ted Cruz of Texas, said he would not delay a vote. The deal would extend U.S. borrowing authority until February 7, 2014. The deal will also allow the Treasury Department to temporarily extend its borrowing capacity beyond that date if Congress failed to act early next year. The deal would also re-open the government and fund government agencies until January 15, 2014. Economic data has been light due to the shutdown. The NAHB/Wells Fargo Housing market index, which measures home builder sentiment, slid to 55 in October and hit its lowest level since June.

THURSDAY & FRIDAY’S ACTION:  Stocks Are Strong

Stocks rallied on Thursday and Friday after a deal was reached in D.C. Now that the noise in D.C. is pushed back for a few months, easy money from the Fed (QE) returns as the primary catalyst pushing stocks higher. Stocks have reacted rather well to earnings (so far) as several well-known stocks gapped up after announcing their Q3 results: GOOG, GE, CMG, AXP, among others. A slew of data is slated to be released next week and more importantly how stocks react to the news.

MARKET OUTLOOK: SPX Soars To A New All-Time High

The market is very strong and evidenced by the very impressive action we are seeing in the major averages after another relatively short pullback. Remember, we focus more on how stocks react to the news than the news itself. So far, the action has been very healthy which bodes well for this very strong bull market. Please note that our goal is to remain in sync with the broader trend of the market (up or down) and not get caught up with the minutiae of changing labels on the market status very often. As always, keep your losses small and never argue with the tape.

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