/perspectives/weekly-viewpoint/the-snapback-rally-continues

The Snapback Rally Continues

Markets have a tendency to toggle between perception and reality and the gloom and doom narrative that was in place during late August/early September always seemed a little excessive. Reality now appears to be setting in as the recent economic data out of China hasn’t been nearly as bad as feared.

October 19, 2015    |    By Mike Schwager

Performance for Week Ending 10/16/15:

The Dow Jones Industrial Average (Dow) rose 0.77%, the Wilshire 5000 Total Market IndexSM (Wilshire 5000SM) added 0.70%, the Standard & Poor’s 500 Index (S&P 500) gained 0.90% and the Nasdaq Composite Index (NASDAQ) tacked on 1.16%. Sector breadth was positive with 8 of the 10 S&P sector groups finishing higher. The Utilities sector (+2.30%) led the way higher followed by Healthcare (+1.91%) and Telecom (+1.97%).

Index* Closing Price 10/16/2015 Percentage Change for Week Ending 10/16/2015 Year-to-Date Percentage Change Through 10/16/2015

Dow

17215.97

+0.77%

-3.41%

Wilshire 5000

20999.21

+0.70%

-1.36%

S&P 500

2033.11

+0.90%

-1.25%

NASDAQ

4886.69

+1.16%

+3.18%

*See below for Index Definitions
 

MARKET OBSERVATIONS: 10/12/15 – 10/16/15

The markets seem to be finding their footing after the shellacking they took in late August. The S&P has posted gains in each of the past three weeks and is up almost 9% from the August lows.

Markets have a tendency to toggle between perception and reality and the gloom and doom narrative that was in place during late August/early September always seemed a little excessive. Reality now appears to be setting in as the recent economic data out of China hasn’t been nearly as bad as feared.

Despite all the negative headlines and news flow, the prospects of falling into a Bear market always seemed a very low probability outcome. Throughout market history Bear markets have almost always had a combination of the following items in place: sharply higher Oil prices, tighter monetary policy, and a growing probability of a recession. Clearly none of these items are currently in place, suggesting the sell-off was a healthy correction and not the start of a prolonged downtrend in equity prices.

Leading the gains over the past few weeks have been sectors and stocks that generally underperformed during the first nine months of the year. This type of reversion trade is typical during the October/November time frame when investors tend to buy the sinners and sell the winners. This rotation has benefited Energy, MLPs, Materials, Oil, and Industrials at the expense of sectors like Healthcare and Biotech. This trend could remain in place in the near-term and could possibly extend through year-end if Q3 earnings season plays out in their favor. Earnings expectations for Materials/Energy/Industrials are really low and may leave room for upside surprise.

While October tends to be a bumpy month, it also tends to be a time when markets traditionally find their footing ahead of a fourth quarter rally. Over the past 20 years, the S&P has posted gains in the fourth quarter 80% of the time with an average increase of 5.15%.

The Week Ahead:
Third quarter earnings reports will be the focus this week with 118 members of the S&P 500 scheduled to report. Included in this group are Dow components International Business Machines, Travelers Companies, United Technologies, Verizon, American Express, Boeing, 3M, Caterpillar, Microsoft, McDonald’s and Procter & Gamble. Housing will be the focus of the data calendar with reports due out on the National Association of Home Builders’ housing market index, housing starts and building permits, and existing home sales. The Fed Speaking calendar will be busy with a half dozen appearances scheduled including Fed Chair Yellen on Tuesday.


Definitions

The Dow Jones Industrial Average is a price-weighted average of 30 blue-chip stocks that are generally defined as the leaders in their industry. It has been a widely followed indicator of the stock market since October 1, 1928.

Wilshire 5000 Total Market IndexSM represents the broadest index for the U.S. equity market, measuring the performance of all U.S. equity securities with readily available price data. The index is comprised of virtually every stock that: the firm's headquarters are based in the U.S.; the stock is actively traded on a U.S. exchange; the stock has widely available pricing information (this disqualifies bulletin board, or over-the-counter stocks). The index is market cap weighted, meaning that the firms with the highest market value account for a larger portion of the index.

Standard and Poor's 500© Index is a capitalization-weighted index of 500 stocks. The index is designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries.

The NASDAQ Composite Index is a broad-based capitalization-weighted index of stocks in all three NASDAQ tiers: Global Select, Global Market and Capital Market. The index was developed with a base level of 100 as of February 5, 1971.

Indices do not include any expenses, fees, or sales charges, which would lower performance. Indices are unmanaged and should not be considered an investment. It is not possible to invest directly in an index.

The individual companies mentioned in this piece were for informational purposes only and should not be viewed as recommendations.

The comments should not be construed as a recommendation of individual holdings or market sectors, but as an illustration of broader themes. This document contains forward-looking statements about various economic trends and strategies. You are cautioned that such forward-looking statements are subject to significant business, economic and competitive uncertainties and actual results could be materially different. There are no gua rantees associated with any forecast and the opinions stated here are subject to change at any time and are the opinion of the individual strategist. Information in this report does not pertain to any investment product and is not a solicitation for any product. This material has been prepared using sources of information generally believed to be reliable. No representation can be made as to its accuracy.


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