Big test ahead for stocks

Key economic indicators have stalled. Could the market's future hang on next week's Fed news?

By Jim J. Jubak Oct 26, 2010 1:06PM

Jim JubakThe next two weeks are shaping up as a critical test for the U.S. stock market.


Several key technical indicators stalled in the past few days, as if waiting for something to happen. Monday started out with a bang, but the markets stalled again in the afternoon.


I think that "something" is probably the Federal Reserve's meeting Nov. 2 and 3. Wall Street wants to know more from Chairman Ben Bernanke on the size and timing of any new program of quantitative easing before moving higher. If the market is disappointed in what it hears Nov. 3 from the Federal Open Market Committee, I think we could get a correction that retraces part of this rally.


Look at the Dow Jones Industrial Average (INDU) to see what I mean. At the Oct. 22 close at 11,133, the index traded within 90 points of its Apr. 26 high at 11,205.


Since moving above 11,000, the index has stalled with high trading volume, Arthur Hill pointed out in his market message on StockCharts.com on Oct. 22. 


High volumes often occur at inflection points in the market. For example, the April high came on a high-volume spike, and the reversals in May, June, and July came on high volumes. A stall here is fine, Hill notes, as long as it gets resolved to the up side. A break below 10,900 on the Dow would be a sign to watch out for the start of a correction.


The markets aren't looking for a concrete announcement on Nov. 3 of another wave of Treasury buying by the Federal Reserve. But Wall Street would certainly be disappointed by a Fed announcement that backed away from another round of quantitative easing and is quite possibly counting on some change in the Fed's language that indicates that quantitative easing is nearer.


The Fed's decision is a big deal for stocks. This rally, especially in the past couple of weeks, has been fueled by the belief that the Fed will put hundreds of billions (maybe as much as $1 trillion, although maybe not all at once) in cash into the hands of investors and traders by buying Treasurys at a time when interest rates are so low that the stock market looks like the best game in town.


It's only logical to expect investors to take a pause here to see if that expectation is correct.


By the way, just so we're perfectly clear, I'm still expecting a fourth-quarter rally. My only question is whether we get it after a short correction or as a continuation of the current rally.

 

At the time of this writing, Jim Jubak didn’t own shares of any companies mentioned in this post in personal portfolios. The mutual fund he manages, Jubak Global Equity Fund, may or may not now own positions in any stock mentioned in this post. For a full list of the stocks in the fund as of the end of the most recent quarter, see the fund’s portfolio here.

2Comments
Oct 26, 2010 7:13PM
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Add to that:  "huge amounts of money in consumer pockets, over time"  ......
Oct 26, 2010 7:11PM
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Think we are heading to a 12500 Dow by year-end and it is the Fed Reserve that will help get us there with the elections.  The Fed buying treasuries and dropping the longer term rates is like putting huge amounts of money, over time, with cheaper rates.  This will build consumer confidence and spending which will grow the economy and the stock market.  We need to figure out when rates will begin to rise and at what time horizon will that be?  Bet it is a year.  That will convince many of us that political gridlock is good for the US economy and socialism is not.        
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