October 2014 is now in the history books. It was one of the wildest months in the history of Wall Street. The benchmark S&P 500 (SPX) is trading like a penny stock (which typically ends poorly). In the first two weeks of October, the SPX plunged -8% and then turned higher on Oct 15 and soared a whopping +11% in the last two weeks. That is a huge move (both up and down) and that type of volatility after a big move (bull market is now 5.5 years old) typically does not end well. Remember, in a non-QE world, a 10% annual gain was considered healthy. So 11% in only two weeks is abnormal and very impressive. Easy money from the Fed has played a major role in sending stocks higher since the historic March 2009 bottom. The SPX soared when QE has been in effect and fell -17% when QE 1 ended and fell -22% when QE 2 ended. The Fed ended QE 3 at the end of October but the market did not fall? The reason is because the QE trade has evolved, like famous investor Mohamed El-Erian so eloquently described it last week. The Fed may have ended QE 3 but they are still adopting an “easy money” stance. Additionally, other central banks around the globe, primarily European Central Bank (ECB) and the Bank of Japan (BOJ), recently began their version of QE.  That’s how the QE trade has “evolved.” Instead of just the Fed printing gobs of money everyday we now have the ECB and the BOJ printing as well. So instead of the old Fed Put (the notion that the Fed will step in and save the day if Main St or Wall St weakened), it has now shifted to the Central Bank Put and this is a huge bullish fundamental backdrop for stocks.

Monday-Wed’s Action: The Rally Continues

Stocks were quiet on Monday as investors focused on the Presidential election in Brazil and the results of the latest European bank stress test.  Our friends at Minyanville reported that, Incumbent President Dilma Rousseff won re-election by the tightest margin in over 60 years, taking just 51.45% of total votes but the market sold off because Rousseff’s economic policies are viewed as ineffective. The results of the ECB’s Asset Quality Review (AQR) was greatly skewed towards an undercapitalization in Italian banks. Of the 25 banks who failed the stress tests, a third were from Italy. The worst bank of them all was Banca Monte Paschi (BMPS), which may need to raise 2.4 billion Euros of debt or seek a merger. In the U.S., pending home sales for September rose a less-than-expected 0.3% from the prior month, up from a 1.0% decline. Economists had expected an increase of 1.0%. From a year ago, sales are up 3.0%.
Stocks rallied nicely on Tuesday after Central Banks in China and Sweden announced a new round of easy money policies. The People’s Bank of China announced a new round of financing and a proposal was announced for new free trade zones in China. The news helped boost Chinese stocks. Sweden’s Riksbank (their central bank) cut its main policy rate to zero from 0.25% which topped analysts estimates for a cut of 12.5 basis points. The central bank also lowered the path of future rate policy and did not rule out a currency intervention with the Krona (their currency) and are open to “non-standard measures” (a.k.a they are open to their version of QE). The Russell 2000 (RUT) closed up a very strong 2.85%. After the close, Facebook (FB) gapped down after reporting their latest quarterly results.

Thurs & Fri’s Action: Bulls Remain In Control

Stocks rallied on Thursday after the latest reading of U.S, GDP grew at 3.5% quarterly annualized pace. This easily beat estimates for a gain of 3% and bodes well for the on going economic “recovery.” The stronger than expected GDP data was largely due to an increase in government defense spending and a larger drop in net exports. The real level of gross domestic purchases remained low, which prompted many economists to lower their Q4 GDP estimates. Stocks soared on Friday after the BOJ surprised markets by increasing QE. The Nikkei (the Japanese stock market) surged and Nikkei futures hit limit up which means they could not go any higher on the day which is incredible and almost unheard of.

Market Outlook: The Central Bank Put Is Alive And Well

Remember, in bull markets surprises happen to the upside. We have also noted that the bull market is aging and may be in the process of forming a large topping pattern but that topping pattern was negated as stocks repaired a ton of technical damage in the latter half of October. Keep in mind that the bull market is aging (turned 5 in March 2014 and the last two major bull markets ended shortly after their 5th anniversary; 1994-March 2000 & Oct 2002-Oct 2007). It is never a dull moment on Wall Street. As always, keep your losses small and never argue with the tape.
 

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