September went out with a bang and October started off strong.

While it may not actually be the best Fall ever, it is the best in a long time. The normal September, early October volatility never appeared and all the indicators are suggesting we could see further gains. The last two weeks of October are normally positive and November 1st begins the best six months of the year. Investors should be celebrating their good luck this year.

Earnings are expected to be positive for Q3 and the next three quarters should average 10% growth. Tax reform is being discussed and will eventually occur in some form. For every 1% cut in the corporate tax rate, we should see annual S&P earnings rise by $2. That may not sound like much but it equates to 36 S&P points. If we get a 5% or even 10% cut, you can do the math. Add in repatriation of $1.3 trillion from overseas and that would be another boost for the market.

Before everyone takes out a mortgage on their kids, we should always be prepared for expectations to be dashed. While the rosy scenario spelled out above may occur in some form, there is no guarantee the market will remain on a vertical trajectory. There will be dips. They could be shallow and sharp but investors will more than likely jump at the chance to buy something cheaper. It has been 461 days since the S&P had a 5% retracement. The average is twice a year. The markets do react to headlines but they do not need an external reason for profit taking.

If I were going to look into my crystal ball and predict weakness, it would be after earnings and before the budget/debt ceiling deadlines in early December. If the market remains positive through November and those issues have not been resolved, December 1st would be where I would expect weakness.

There is also the risk of some earnings disappointments to gum up the works or geopolitical events like North Korea and Iran. There is always another headline ahead and it is the ones we do not expect that cause the most trouble.

The S&P is in breakout mode and the six-day streak of consecutive gains ended on Friday with only a minor decline. Resistance is going to be even number increments from 2,550, 2,600 and 2,650. The prior uptrend resistance should now be support at 2,525 followed by 2,490.

The Dow almost extended its streak of gains to 8 days but missed it by less than 2 points. That means is closed less than 2 points from a record high. The components were almost evenly mixed but Chevron erased 10 Dow points after crude prices fell -$1.50 on Friday.

Prior uptrend resistance should be support on any weakness followed by 22,500 and then the late September support at 22,275.

The first Dow component, JPM, reports earnings before the bell on Thursday. That, plus Citigroup's earnings at the same time will influence the financial stocks and that could move the market. Both are expected to beat estimates but that means expectations are high and only a minor beat could be a disappointment.

The Nasdaq managed to close at a new high and extend its streak of gains to 9 days. The Nasdaq has benefitted from the rotation back into the big cap techs and the Netflix rally late in the week did not hurt. That helped boost sentiment for all the big cap stocks. Apple was the only one to close in negative territory on Friday and it was only -9 cents.

Resistance is around 6,650 and support should be back at the 6,460 level that gave us so much trouble on the way up. I would expect some profit taking this week.

The small caps are holding their recent gains. The Russell closed only 2 points below its record high. After a 162 point rebound, the staying power at 1,510 is remarkable. I cannot look at this chart without seeing a dip in our future but the internals are still bullish.

The Q3 earnings kick off on Thursday with the first of the banks followed by several more on Friday. With rate expectations rising, guidance should be positive but there are high expectations.

The bond market is closed on Monday and equities normally trade muted without the bonds for guidance. Tuesday is the day analysts expect North Korea to fire another missile and there is a growing feeling that the U.S. may try to either shoot it down or blow it up on the launch pad as a message to Kim Jong-Un. Either option carries significant risk. An attempted shoot down that fails would look bad for the U.S. and give North Korea a boost. A cruise missile attack on the launch pad could cause an unpredictable response from rocket man. China also said they would back North Korea if we attacked first.

The FOMC minutes on Wednesday will be a highlight since the Fed initiated the QE taper at the last meeting.

The Producer Price Index and the Consumer Price Index will give us input on inflation and that determines the Fed's moves at the December meeting.

I believe the market will continue higher over the next several weeks but it may not be a continued vertical move. Markets normally take the stairs up and the elevator down. Without a major geopolitical event, we are nowhere near an elevator move. That means the indexes are likely to continue taking the stairs higher with a few days of profit taking sprinkled in the mix to make it interesting.

Continue to buy the dips until proven wrong. Retain some cash in your account in case an elevator drop appears.

Enter passively, exit aggressively!

Jim Brown

Send Jim an email