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An October to Remember; Now What?

After a record rally in October, stocks tumbled yesterday and falling again today, leaving investing pros in yet another quandary: What to do next?

Stocks were down more than 250 points this morning, after declining 276  points Monday on renewed worries about the European plans to fix the region’s debt problems. As a result, the Dow Jones Industrial Average finished up 9.5% for the month – the third-biggest monthly percentage gain in the Dow’s history. For the year, stocks are now up 3.3%.

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But the latest dive tempered some advisers’ optimism. While many still believe stocks could finish the year on a high note — what’s known on Wall Street as the “Santa Claus effect” — they also worry that October’s wild swings will continue into November. Last month, stocks dropped more than 100 points four times, but gained more than 100 points 11 times. Indeed, some experts say the markets need resolutions to some key economic problems – such as more details on how the European debt deal will be implemented and more clarity on how Congress will reduce the federal deficit.  “A continued lack of clarity could … have a dampening effect on investors,” Savita Subramanian, head of U.S. equity strategy for Bank of America-Merrill Lynch, wrote in a note to investors on Monday.

As a result, some pros are sounding a more cautious note. In a note to clients today, David Kelly, chief market strategist for J.P. Morgan Funds, last month’s gains are  “probably” sustainable. Kelly points out that markets could still be swayed by economic reports due this week, including data on U.S. employment, and the Federal Reserve’s meeting concluding Wednesday. Also, the European Central Bank and G-20 political leaders will meet to discuss the European economy and debt deal. Still, he’s recommending that individual investors take on a bit more risk in equity markets than normal.

Indeed, there are reasons to be optimistic. Analysts say earnings season got off to a good start, with about 70% of companies beating expectations. Retail investors also seem to have a brighter outlook.  An October survey of 475 investors by Charles Schwab found that most investors who trade at least 36 times a year were more confident in the market: 72% said they expect the S&P 500 to finish the year flat or with an overall gain. On top of that stocks typically end the year up. Since 1945, the Standard & Poor’s 500-stock index has gained an average 3.7% in the last three months of the year and the Dow has always risen in the third year of a president’s term.

Others advisers say they’re sitting tight. Peter Lang, managing director at HighTower Advisors in Harrison, N.Y., says he is waiting to see what the Congressional supercommittee proposes for reducing the federal deficit before making any changes to his clients’ portfolios. Same goes for the European debt deal. “I wouldn’t be shocked if market goes down to 11000 in the next three to six months,” he says.


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    • Here we sit on a lofty perch, shall we fly or fall and die? While it may not be pretty, this market is working towards an even more bullish technical outlook daily. There are still doubters that we hit capitulation on October 04, 2011, and that is good because just like bear markets try to get bulls in bad spots, bull markets get bears in bad spots. Every trade has two sides and making money means that someone else has to lose it. Please don’t all come to the party at once, October 27, 2011, was a little bit crowded with 4.91 Billion volume and all. The 50 day simple moving average is now our lowest support trend line and is increasing the slope of its upward movement. The 20 day simple moving average will cross above the 100 day simple moving average in a few days and when that occurs, the market will go up some more. So long as the price action stays ahead of the 10 day simple moving average, then this big ugly bullish machine will keep rolling along. Is the price action of the SP500 above the 200 day simple moving average ideal? Sure, but it really doesn’t matter at this point until the price action is squeezed between the upwards trekking 10 day simple moving average and the 200 day simple moving average that is flat lined. If the price action jumps back above the 200 day simple moving average, then the elevator will continue up; price action below the 10 day simple moving average spells a downward trend.

      Let me emphasize, we are sky high. The upwards resistance over the very short term is the 200 day simple moving average. Given that we’ve crossed it once before on the upside, breaking above it again on a slightly higher volume day should be doable. Short term support is the 10 day simple moving average, which is moving quite rapidly upwards. Notice though how it has served as support since we crossed above it on October 06, 2011. Think about that: nearly the entirety of this historically jinxed month the price action of the SP500 has not closed below the 10 day simple moving average. That’s a bullish trend for a time long enough to help fix the charts that August flat-out broke. It’s a ways away, but the 1370.58 high achieved in May 02, 2011, is the real test of confidence and the upside resistance. Short term, this positive trend will play out and continue to sucker bears into the wrong sides of bad bets. Look for slowing at the 200 day simple moving average as discussed before and the October 27, 2011, high of 1292.66 on 4.91 Billion volume. Downside support is at the 10 day simple moving average of 1243.71, followed by fairly strong support at the 100 day simple moving average of 1230.22 in combination with the high on October 18, 2011, of 1233.10 on 3.93 Billion volume. Notice that? See how we’re stacking gains in the index on top of support from previous gains? Bull markets do that. Watch for the small simple moving averages to cross above the large simple moving averages. It will simply be virtuous.

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