We hope it was a profitable and more enjoyable week in the markets for you than the last.

The stock and bond markets seem to think the door has closed, or is about to close, on future rate hikes. Stocks soared and rates came down (as bonds rallied). Everything turned on a dime.

You may recall the three charts we posted last week. Those charts had an abundance of history behind them, and due to their significance, our call was that the November turn could be upon us. We are once again sharing the two charts we put in the end of last week's market outlook. We also said that we would provide you with information that points to the best six months of investing that may lie ahead. See below:

As you are all too aware, the previous month of October had been frightful. Indeed, the markets had become oversold, and the normal seasonal cycles were oncoming. We luckily got a sharp turn. Yet, the question remains, “can this positive investment environment last?” Let’s dive into this week’s action.

Over the weekend, there was concern by many analysts that the “selloff” that had taken place over the previous few weeks, coupled with major geopolitical risks and higher interest rates, could get worse and the markets might fall off the proverbial “cliff.” Our outlook last weekend took a positive position that things could soon turn in November.

From the start of the opening bell on Monday, there was a positive bias in the market. Stocks gapped higher at the open, as there had been no material rise in geopolitical tensions in the Middle East over the weekend, with Israel’s ground invasion of Gaza ultimately being a less-significant military development than initially feared.

Europe (as in Spain and Germany) came out with lower inflation readings than previously expected, and that ramped up money flows around the world’s developed stock exchanges.

While we remain in “earnings season,” Monday morning saw additional good earnings from the likes of McDonald's that helped create a positive investment sentiment. McDonald's is a good proxy for retail sales and the state of the economy, as evidenced by some economic analysts who use the “Big Mac” index. But all eyes were on Tuesday and Wednesday, with the Fed meeting and a possible surprise rate hike.

On Wednesday, the markets were all up over 1% as the Fed came out with its announcement that there would be no rate hike. They did use words to offset the need to raise, which included “tighter financial conditions” on households and businesses.

After Fed Chairman Powell’s press conference, most analysts believed that the Fed is successfully “threading the needle.” The Chairman reiterated the commitment to getting inflation down but maintaining a willingness to react to changing economic conditions.

The stock market continued its rally on Thursday as the US dollar declined. We have long held that the dollar would be one of the strongest headwinds against financial asset appreciation in the US. See the following chart of the UUP ETF's dramatic slide this week:

On Friday, the JOBS report was featured. There was some good news as employers added 150,000 jobs in October, half as many as they did a month before. Job growth was also revised downward 297,000 for September, a Bureau of Labor Statistics report showed on Friday.

Meanwhile, wage growth slowed, and the unemployment rate rose to 3.9%. This counted as another piece of evidence that the Fed is done raising rates this year, with the futures market now indicating that the chance of a rate hike in December is below 5%, down from about 20% on Thursday. Average hourly earnings rose 0.2% from a month earlier, putting them 4.1% higher than a year earlier. That was the smallest year-over-year gain since June 2021, though unlike then, wages are now outpacing inflation.

Can Jerome Powell Declare Victory? 

Maybe not just yet, but a cooling US job market gives the Federal Reserve Chair and his colleagues room to keep interest rates on hold in December, and it reinforces market views that the central bank is done with rate hikes—all as it zeroes in on a soft landing. “Put a fork in it. They are done!” said Jay Bryson, Wells Fargo’s chief economist. “This is very good news for the Fed.”

One takeaway is that the job market is moderating, but not buckling—a message reinforced by a variety of other data, including low levels of weekly unemployment claims and layoffs. Another is that the Federal Reserve is probably through with tightening: Futures markets on Friday morning indicated that the chance of the central bank raising its target range on overnight rates at its December meeting was below 10%.

The yield on the 10-year Treasury notes, which briefly hit 5% less than two weeks ago, continued to retreat on Friday, falling to 4.53% mid-morning. Take a look at the chart of the past two months. Notice the bottom line (RSI-Relative Strength Indicator), and how it’s moved from overbought territory (above 70) to around 40. This is one roller-coaster ride for bond investors.

On Friday, bonds and stocks rallied. The tech-heavy Nasdaq Composite rose 1.4%, while the S&P 500 gained 0.9%. The Dow Jones Industrial Average ended the day up 0.7%, or 222 points. All three indexes are up more than 5% over last week. We are now well above the October lows. See chart below:

The 20-year Treasury Bond ETF that we frequently use in a few of our strategies had a big day on Friday. It was one of the biggest weeks for the TLT ETF after a long and painful slide for bond investors. See chart below:

Risk (as defined by the VIX) declined faster this week than in 20 years. See chart below:

“In order for the stock market to rally, we will need lower interest rates and a weaker dollar.” This is something we have often repeated in this column over the past year, and Mish has also brought this up in her TV appearances. As referenced in the charts above, this happened in a big way this past week. It did not take long for the stock market to recover some of its losses from the prior few months of selling. See chart below:

Turning Point?

It was almost a “perfect” stock market performance this week. It was a complete “boomerang” from the recent downtrend. This was one of those sharp V’s that stock market analysts like to point out as a major shift in investment sentiment. See chart below:

But it might surprise you to learn that the “best performing stocks this week” were also the most beaten-up stocks and the ones that had suffered through the prior month the most. See the following chart:

And the 30 stocks from the Russel 1000 index (top 1,000 market cap stocks) that had the best performance this past week can be seen in the chart below.

An Earnings Update

According to FactSet, 81% of S&P 500 companies have reported their Q3 2023 results, with 82% beating their earnings estimates and 62% reporting revenues above estimates. We remain confident that as long companies are exceeding expectations, even with lowered estimates, this will help prop up the market from an oversold condition as we saw two weeks ago.

Company earnings are still growing on average by about 7%. When this begins to decelerate, we will enter a prolonged bear market.

Last week, we mentioned that we saw signs of the market about to “turn” in the near-term. I now offer a few shorter-term graphs to show you what we spotted.

Stocks above their 20-day moving average started moving two weeks ago. This gave us an early signal that the turn would take place. See charts below (when the number of stocks moves decisively above the moving average of the increase, it turns blue, indicating a strong buy):

The intermediate signals (stocks above the 50-day moving averages) are just now starting to turn as well, giving us indications that this rally could have legs. See similar charts below:

Another series of charts, not included here, may illustrate the longer-term trend, which is derived from the number of stocks above the 200-day moving average. These colored charts for the DJIA, NDX, and S&P do not yet show a significant turn. To us this indicates that it is questionable whether or not the current move has long-term legs.

If these longer colored charts get more positive, this could suggest a significant move up, as there is a tremendous amount of cash on the sidelines. Watch for near-term behavior of the US dollar, interest rates, and the underlying strength of the stock and bond markets.

Is The Door to Future Rate Increases Completely Shut?

To that question, we would say “no.” There still remain inflationary forces at work in our economy. Unless and until such a time that we may see job growth completely subside and GDP go flat, there is always the risk of additional rate hikes.

The market could also see higher rates, as there are over $700 billion in upcoming Treasury rate auctions until year-end. The US government is running a very large deficit. Therefore, the government is issuing a massive amount of debt at upcoming auctions. If any of the upcoming auctions go badly, as the most recent ones have experienced, rates could begin to float higher.

That would likely provide strength in the US dollar, and those two forces (higher interest rates and a higher US dollar) would put pressure on the stock and bond market. It also could motivate the Fed to take action, either through more quantitative tightening or even rate hikes. The door remains open a crack.

Remain Careful and Vigilant

We have experienced a positive turn in the stock and bond markets. We are now in the best six months for investing (the positive seasonal investing period), especially when factoring in the positive bias of a pre-election year. Notwithstanding these factors, risk remains in the markets. One of the catalysts could be an expanding role of the United States in the Middle East geopolitical turmoil.

Have a good and profitable week ahead. Please stay safe. Finally, here are some further factors that may have played a part in the week's trading.

Risk-On

• The key US market indices all had their best weekly performance of the year this past week, with the laggard of the bunch being the Dow, which closed up about 5% this week, and the leader being the Russell 2000 (IWM), which was up nearly 8% on the week.
• 3 of the 4 key US indices reclaimed a bullish phase this week by closing back above both the 50-day and 200-day moving averages, with the exception being the Russell 2000, which closed just beneath its 50-day moving average to end the week.
• Volume patterns have begun to even out to neutral readings over the past two weeks for 3 of the 4 key indices. However, the Russell 2000 has experienced positive volume patterns, with four accumulation days compared to one distribution day over the past two weeks.
• All major market sectors were positive this week, with some of the more speculative areas being the top performers, including homebuilders (XHB), up 11%, and semiconductors (SMH), up 8.1%, over the past five trading days.
• Energy plays such as oil, clean energy (PBW), and solar energy (TAN) all performed well this week along with equities.
• Along with the explosive price action this week, several market internals indicators ran red hot, including the McClellan Oscillator and the up/down five-day volume ratio for both the S&P 500 and the Nasdaq Composite. However, these indicators now look to be at heavily overbought levels after such a quick move.
• The short vs. mid-term volatility ratio has broken back into positive territory, indicating improving sentiment amongst buyers this week.
• Cash volatility has broken back beneath both of its key moving averages for the first time since mid-September, which is a bullish indication.
• The number of stocks above key moving averages surged on short-, mid-, and long-term timeframes this week. Now, nearly 90% of the stocks in the S&P 500 and the Russell 2000 indices are above their 10-day moving averages, and nearly 50% are above their 50-day moving averages.
• The 20-year treasuries are now retesting the 50-day moving average as resistance for the first time since July, and the Real Motion indicator shows that momentum has already begun to reclaim its 50-day moving average, a potential leading indicator of a further move higher.
• Value stocks (VTV) and growth stocks (VUG) are moving at a similar pace and direction. Growth stocks, however, look to be slightly leading after reclaiming the 50-day moving average.
• Regional banks (KRE), semiconductors, and retail (XRT) all reclaimed their 50-day moving averages.
• Foreign equities (EEM & EFA) also participated in this week’s rally, with both ETFs reclaiming their 50-day moving averages and continuing to outperform US Equities on a short-term basis.

Risk-Off

• Despite this week’s move, risk gauges remain at a risk-off reading.

Neutral

• Soft commodities (DBA) closed Friday at a new 2023 high, but seem to be heavily overbought and likely to revert in the immediate future. Looking at momentum, the ETF has made several consecutive lower highs despite making a new high in price, indicating potential internal weakness.
• Both gold and oil appear to be barely holding onto current support levels, with both now beginning to lose their relative leadership against the S&P 500.

More By This Author:

A Frightful October In The Markets - Will The November Seasonal Turn Happen?
New Highs, But Perhaps Not Where You Want Them
Turbulence From Headwinds But Reasons To Get Positive On The Market