SUMMARY:
- Once more a convergence of positives along with some technical issues jumps stocks higher.
- Done deal? EU appears to have a definitive agreement to solve a debt crisis with more debt.
- Q3 GDP at 2.5% tops expectations.
- Jobless claims remain just over 400K.
- Pending home sales fall for third month: everything appears better but the housing market.
- Recent market leaders are not the recent leaders.
- Indices are now above the next resistance with some room to run once more.

Strong break upside on an apparent view that all is well in Europe and the US. 

Once again a confluence of positives (along with some technical and market issues) jumped stocks to the upside. It was a strong move with breakouts through resistance for SP500 and the other indices across the board.

SP500, +3.4%; NASDAQ, +3.3%; Dow, +2.8%; SP600, +5.1%; SOX, +4.3%.

Big moves all day long, and they started early. Stocks started with a big gap to the upside. They tested quickly, but then it was all upside. A little dip late in the day was nothing just a bit of giveback. What could have caused this kind of move? I have been talking about several themes, and it was actually all of those themes coming together and having a synergistic effect upon stocks.

Looking at the news, we had some solid earnings results. V beat and put in a nice 2.5% day. BMY beat, CL beat, and XOM beat as well. None of those were screaming to the upside, but it was the tone. These are the big names people talk about, and there was a lot of filling in by a bunch of other stocks that were performing quite well. While guidance was not as great, earnings were very solid and good enough at least good enough with the other factors coming into play.

Jobless claims were at 402K. That was right in line with expectations, but that is better than lately where they have been wrong and it was down. The bigger story was the initial read of Q3 GDP. It came in at 2.5% versus the 2.3% expected. It was 1.3% in Q2. This is not enough to grow us out of the jobs problem, but it was better than expected kind of. That was the official expectation; there were whisper numbers all the way up to 3%. It did not hit those, but a beat is a beat. It did not seem to hurt the market much either.

We had some decent economic data coming out as well, and that is a nice turn of events. It is adding onto what we have seen lately. We got some good data, we got good earnings, and then we got a deal. Europe announced a deal this morning. It is a little short on facts and long on promise, but a deal nonetheless.

Was it all the jobless claims? They were good. Was it the Q3 GDP? Better than expected sure helped. Was it earnings? Those were nice, too, but it was the European deal that sealed the deal. As I said in the economic alert, “Ding-dong the crisis is dead.” Or at least that is what you would have expected with the response of the stock market and other markets. Massive gap to the upside on the open. Those were the stories driving the action, but the market was ready to move. What do I mean by that? I have talked about this lateral range up at the top of the August to October range. Remember the market was bouncing back and forth each day like a pinball, closing on the highs or the lows. We are talking 2-3% moves each session. One day it sold off to the bottom of the range, but the buyers bounced it right back up positive. I said that was bullish. It was a change of character. I said something could be in the mix, and sure enough the next session the market broke out of its range. Then we have the shorts coming in to cover. Then there was a quick selloff and test, and they were right back in the mix once more.

We had the buyers moving in, and they were ready to buy big time on Thursday. One of the reasons was that the shorts were covering. We broke through one resistance level and then through another resistance level. The shorts were forced to cover some more. On top of that, you have funds that have been behind the 8 ball. They have not participated in any move. They missed out on the first move of the year. They felt good when things sold off, but now they have missed out on this run. Just a couple of weeks ago, no one thought this rally had any conviction. They did not think there was any possible way it could make the next move higher. I had grave doubts about the matter. Nonetheless, I said when you have that much negativity you will have a move. Or at least you have a high likelihood of a move, and that is exactly what was delivered.

High disbelief in the market. High negative sentiment from the bull-versus-bear advisors. That has helped catapult the market to the upside. Those that were so bearish have to come in and buy now. We have shorts covering, and we have funds having to play catch-up on this rally. Why do they feel like they have to play catch-up? Because of year-end dynamics. The market wants to rally. Techs led the move off of the low. AAPL, GOOG, AMZN, and other NASDAQ 100 stocks leading the move higher. They sparked it and other sectors are running with it now. Obviously NASDAQ is not doing too badly itself as it gapped above the next resistance level. Again, not only do we have some decent fundamental issues pushing the market, but we had technical issues pushing the market and driving it higher as well. They have all merged, and it is quite a powerful combination. The results of the session speak for themselves.

With this kind of day, a lot of buys were moot at least with respect to new positions. A lot of the plays we were looking at simply gapped away from us. CTXS exploded higher on its earnings and was gone. CSC gapped away. Many stocks we looked at were gone in the blink of the opening bell. That happens, and you cannot hit them all. We have been buying stocks along the way and were more than happy to let them run higher and bank some gain on stocks such as KLAC and ONXX. ONXX continues to rally to the upside and make us money. We are more than happy to let it do just that.

Even the retailers have been doing okay. ARO was not a dynamic move, just up a mere 7.5% on the day. We were able to take some gain off the table as it is bumping up into the gap point. A logical place to take some gains, especially after the market has surged as much as it has. But we were content to let most of our positions continue to the upside. It is a pretty good feeling when people clamor to get into the market and gap it higher just so they can push the stocks you own to the upside. We will let them do that. We will see how far they are willing to push the stocks and how much gain we can wring out of this move.

FRIDAY

We will have Personal Income and Spending out ahead of the market. The final Michigan Sentiment for October comes in about a half hour into trade. Frankly, these may be afterthoughts to the move. As we know, we have the deal in place. The one problem we could have is that the deal turns out not to be so great after all. There may be some buyers’ remorse, and we may hear some remarks to that effect. We will have to see. This is a strong move, and the markets took off to the upside. We cannot just count on Europe being Europe and having problems although maybe we should.

We have these reports, but, again, I think they will be afterthoughts. I want to focus on the future thoughts about where the market goes from here. As noted in leaders, we had stocks with the good rounded bottoms providing the impetus to the upside. They can give the market a continued move into the range that they broke in today. They may want to come back and test. They may want to move forward from here. There is a lot of momentum and maybe a lot of chasing the money ahead of the weekend. Then maybe in the last hour or so we get a pullback. We have had a tremendous break and a nice run in all of October. After you have a move like that, you generally get a little back testing or at least some selling and profit taking at the end of the week. Another consideration, however, is if there is a lot of short covering. The shorts may not get that luxury of the little pullback. The squeeze play could continue to squeeze and keep stocks higher.

Where does that leave us for Friday? Not doing a lot. It is hard to find any good upside buys after this kind of rally. We have had a bit of a pullback. We were able to buy some of them, but when they gapped away from us today, it was frustrating. We saw some great setups in stocks that we wanted, but we did not want to pull the trigger. If we did, we would be buying in after a move. While we may get some more upside, I am never comfortable buying after big gaps. When a stock runs 8, 10, or 20% in a day, you hate to buy in after that. Maybe we get a pullback that lets us do that. We will be watching for that. But it is tough to move in after this kind of break on a Friday ahead of a weekend. And we may see some more news come out about this deal in Europe. As I said earlier, it was short on facts and long on promise. We will have to see what the details are when they come out. That may cause a little giveback. I do not want to buy into stocks that have made this kind of move just to have it come back and fill that gap.

We have great positions that are moving well for us. We will let them continue to work. If they get up to a target or put in another solid run and have several days to the upside, we can take some off the table. We did some of that on Thursday, and we will be looking to do that some on Friday as well. Then maybe over the weekend we can start looking at some downside plays. I know that seems like the furthest thing from anyone’s mind, but let us keep an open mind as the indices move up toward the top of this next range.

They still have room to run, and that could be several days’ worth if they want to backfill and move higher again. Let’s just be ready for whatever happens. A lot of people are declaring that the crisis is dead in Europe. There are also a lot of people saying there will be no recession in the United States. Looking at the numbers, they get that kind of positive hope built up over the last few weeks with improving economics and then this GDP report. But beware. ECRI has never been wrong, and they are saying we will have a recession. I am looking for the new report that comes out in the morning to see what it says, but it would have to change dramatically. ECRI has said that all the factors are in place which have shown recessions in the past. We have to keep that in mind and bear with that as we listen to the ebullient financial stations and people talking about how this is the end of the recession and things will be great from here on out. It is not that I want them to be bad. I want them to be good, but do not get carried away and lose sight of what the real indicators have told us in the past.

Remember, you always get in trouble when you start thinking, “It is different this time.” What has changed to drive the economy higher from here? We are backing out some of the selling on the European fear that occurred in July and August. We have almost backed out 80% of that now. Is the economy improved enough to warrant a new breakout to the upside? Is growth at 2.5% enough to warrant the market to break out to the upside? Is there a major change in policy that has occurred that will suddenly cause the U.S. economy to spark to life as gasoline prices remain above $3 a gallon? I am not convinced that it is out there. It may be. I would not be the first time I have been wrong. It would be the first time that ECRI has been wrong, though.

Let us just keep our heads on and let our positions ride. Do not throw caution to the wind. We have lots of great positions that we can let run and make money for us. If we get shots to move in and can make good strategic buys on plays that would make us money up to the prior peak in April and July, we will make them. But tomorrow is probably not the day to do that unless we get some kind of big back draft. Frankly, if we get a big back draft, will we want to move into them? I do not think so. I would like to see how this move shakes out and then step in. Buying after a huge breakout is tough. Everything is in flux. Be patient and let things set up. Play your game; do not let the market make your game for you. Take what the market gives, but do not let it force you into things that you are not in position to take advantage of. It is often a sucker’s deal to play gaps to the upside like this. You can make money on them, but I would rather let it come back and then make solid entry points.

It was a great day. We will enjoy it for what it is, but let’s keep our heads on about what the future holds and not get caught up in this rally where everyone is saying this could be nirvana. Looking at what we have going in this economy and what Europe is actually doing trying to cure debt with debt nirvana is not quite there yet. We will take what the market gives for now, but keep one eye open and try not to get cold cocked.