Improving. October is the last month of the “Worst Six Months” for DJIA and S&P 500 and the last month of NASDAQ’s “Worst Four Months”. Frightful history of market crashes aside, October has been stellar in midterm years, number one month for DJIA, S&P 500, NASDAQ.
Frothy. According to Investor’s Intelligence Advisors Sentiment survey bulls are at 60.6%. Correction advisors are at 21.1% and Bearish advisors are just 18.3%. The difference between bulls and bears is at a worrisome level and has been for four of the last five weeks. The CBOE Volatility index, or VIX, is also rather subdued with readings on either side of 12 over the past week. Bullish sentiment can remain elevated and the market can continue to climb, but at some point both bullish sentiment and the market will retreat. Based upon current fundamental and technical readings any retreat is likely to be brief and could make a good buying opportunity ahead of the typically bullish fourth quarter.
Firm. Broadly speaking, economic data is solid. Atlanta Fed GDPNow model is currently forecasting Q3 growth of 3.8%. Employment statistics are robust with an unemployment rate of 3.9%. Housing may be in a soft patch as sales modestly dip, but prices are firm (and likely the cause of the decline). Trade and tariffs are a concern, but at current levels the impact appears manageable. Corporate earnings are robust now, but comparisons will be tougher next year.
Consolidating. DJIA was last to trade at a new all-time high last week. Since then, DJIA, S&P 500 and NASDAQ have all mildly retreated. Weakness near the end of Q3 is not uncommon. The rally is likely to resume once October arrives. The long-term bullish trend is still intact.
2.00-2.25%. At the conclusion of its September meeting, the Fed did exacting what everyone expected. It raised the Fed funds rate by 0.25%. During the post-meeting press conference Fed Chair Powell acknowledged the currently strong economy and indicated that further rate increases were more than just likely. Unfortunately, the Feds own estimates for future growth and inflation remained rather tepid and the yield curve has only flattened further. The Fed is likely the biggest risk to the economy and the stock market at this time as too much monetary policy tightening could easily derail growth just as it has begun showing sign of accelerating.