Wall St Week Ahead: Stocks seek direction after Fed, elections

(Refiles to change word ‘jump’ to ‘jumping’ in penultimate
paragraph)

By Chuck Mikolajczak

NEW YORK, Nov 5 (BestGrowthStock) – Wall Street navigated through
three major landmines this week — the elections, the U.S.
Federal Reserve meeting and jobs report — with barely a
scratch. Now what?

With earnings season winding down and a light economic
calendar next week, the market will be left to its own devices
to sort out its direction.

A rise of more than 16 percent in the S&P 500 (.SPX: ) since
the start of September had many investors expecting a pullback
after the trio of big events. But it appears to have emboldened
them instead.

The CBOE Volatility Index, a measure of market anxiety, has
slipped below 19 and the late-week action suggests a market
getting ready for more gains — not a sell-off.

“Some of the alternatives to stocks (bonds, cash, etc.) now
look much less attractive, which should push money in the
direction of stocks,” said Bill Luby, a private investor in San
Francisco, who writes the VIX and More blog. This will result
in “reducing some of the downside risk for owning stocks, and
also putting downward pressure on the VIX.”

With the Fed supporting markets through quantitative
easing, rates could remain low for quite some time. That, in
turn, should help stimulate borrowing and make riskier assets
more attractive. It could take data of a momentous nature —
something that suggests the economy is not responding to the
Fed’s plan to buy $600 billion in Treasuries — to cause
anything more than a minor slip-up in the market.

“What the Fed is doing is a consistent increase in money
supply. Consistency will be much more important to the psyche
of investors than big spikes,” said Edward Hemmelgarn, chief
investment officer of Shaker Investments in Cleveland.

That feeling permeated the market even before Friday’s jobs
data, which showed the fastest payroll growth in the private
sector since April. It is difficult to see the market fighting
Fed-led stimulus, strong corporate results and labor force
improvements. For details, see [ID:nN04265378]

DIAL ‘M’ FOR MOMENTUM

The Fed’s intentions make the search for yield even more
intense, which could bolster financial stocks in coming days.

Financials climbed solidly higher on Friday, with the KBW
Bank index (.BKX: ) up 2.2 percent, on talk the Fed may allow
stronger banks to increase dividends. They could continue to
climb as they have underperformed the rally since September.

Call volume in the Financial Select Sector ETF SPDR fund
(XLF.P: ) surged, as option traders exchanged about 618,000
contracts in the XLF on Friday, led by the trading of 480,000
call options. The overall options volume was three times
greater than its average daily turnover, according to options
analytics firm Trade Alert.

A correction might still occur, though. A number of
indicators suggest the market is in position to consolidate.

The 14-day relative strength index is at 88.5. A reading
above 70 usually indicates an overbought condition. However,
some analysts say the indicator for an overbought market
expands in a bull market. So this level may not necessarily be
a bearish indicator.

Bespoke Investment Group noted the rally has put the major
indexes and sectors into “extreme overbought territory” in the
near-term, with the S&P 500 and six sectors at or near two
standard deviations above their 50-day moving averages.

“Some sort of correction may be in order at some point from
after the events of this week, and the ‘feel good’ holiday
seasonality period looming a few weeks away,” said Robert
Zavell, derivatives analyst at Jones Trading. “Is it possible
we will be up every day from now through New Year’s? I thought
not every day, but you never know.”

The S&P 500 faces strong resistance at around 1,228, a key
retracement of the benchmark’s slide from its historic high in
2007 to the 12-year low in March 2009.

The first attempt at piercing that level in April failed
and preceded a decline that took the S&P to its 2010 low in
early July.

“It’s the second test of a very important number so what
the market does here is pretty critical,” said Richard Ross,
global technical strategist at Auerbach Grayson in New York.

“The difference from last time is that we had a pretty
sizable correction from that April high, so we have a much
stronger base now,” he said.

Another factor that may add fuel to the breakout is
performance chasing, with investors who may be latecomers to
the rally jumping into winning stocks with the hope they will
continue to gain in an effort to enhance their portfolio
performance.

“You are seeing momentum investing — managers just moving
into stocks that have been doing well,” said Tim Ghriskey,
chief investment officer of Solaris Asset Management in Bedford
Hills, New York.
(Wall St Week Ahead runs every Friday. Questions or comments
on this column can be e-mailed to:
Charles.Mikolajczak(at)thomsonreuters.com)
(Reporting by Chuck Mikolajczak; additional reporting by Doris
Frankel and Rodrigo Campos; Editing by Jan Paschal)

Wall St Week Ahead: Stocks seek direction after Fed, elections