Another week of high-octane drama marked by sharp swings ended well for major stock proxies. News from Washington had a lot to do with the down and up action, which seemingly left the market well positioned for November. A strong rally greeted investors on Monday after the Bush administration nominated Ben Bernanke for the job of Federal Reserve chairman to replace Alan Greenspan. An even stronger rally finished the week Friday as the Dow Jones Industrial Average advanced 172.82 points, or 1.7%, to 10,402.77. The S&P 500 rose 19.51 points, or 1.7%, to 1198.41 and the Nasdaq Composite gained 26.07 points, or 1.26%, to 2089.88. In a sign of newfound optimism, Microsoft ( MSFT), whose results and guidance disappointed Thursday after the close, gained 2.7%. Energy shares were also rallying, even as crude oil prices dropped, after Chevron ( CVX) posted strong earnings. Gateway ( GTW) gained 5.5% after posting better-than-expected revenue for the third quarter. But between the big gains Monday and Friday, there was a lack of follow-through and at times severe selling pressure amid concerns about politics and disappointment over quarterly results and/or guidance from firms such as Amazon.com ( AMZN), Exxon Mobil ( XOM), Texas Instruments ( TXN) and Boeing ( BA). Throughout October and earning season, the stock market has been trying to find catalysts for a traditional year-end rally. But that's so far been mired in uncertainty about the economy, inflation and fourth-quarter profits. Consumer confidence, as seen Tuesday in the Conference Board's October survey, remains gloomy after the hurricane-induced energy spike and ahead of what's expected to be a costly heating season. Adding to the nervousness this week was mounting trouble for the Bush administration: On Thursday, there was news that Harriet Miers withdrew her nomination to the Supreme Court. On Friday, a special prosecutor unsealed a five-count indictment charging Vice President Dick Cheney's chief of staff, Lewis Libby, with lying to the federal grand jury probing the Valerie Plame affair.
"With even Republicans breaking ranks with him in Congress, Bush has gone from 'lame duck' to 'dead duck' in the space of a week," says Marc Pado, Cantor Fitzgerald market strategist, who added that traders are worried that Bush will be prevented from making his current tax cuts permanent. But on Friday, the market took heart in the Clinton administration's mantra: "It's the economy, stupid." On that front, the news was good. The economy was still powering ahead with little inflationary pressures before Hurricane Katrina and Rita, as seen in the initial estimate of the third-quarter GDP. The news inspired a rebound early Friday, which accelerated late morning trade as it appeared that Bush top advisor Karl Rove would not be indicted, although he remains under investigation. Friday's rally helped major stock proxies continue their contorted move upwards from the October lows which, although they were tested again on Thursday, stood their ground. For the week, the Dow gained 187 points, or 1.8%. That also leaves the index 1.8% above its October lows (it fell fractionally below its Oct 13 closing low of 10,216 last week). The S&P, meanwhile, gained 1.6% this week, and now also stands 1.6% above its Oct. 13 low close of 1176 (it fell to 1179 last Friday). The Nasdaq advanced 0.3% this week, but it stands 2.5% above its Oct. 12 low of 2037. But Friday's optimism could be quickly eclipsed next week by concerns about the Fed. The Federal Open Market Committee meets Tuesday and is widely expected to deliver another rate hike. As usual, the language will be monitored closely to determine whether the market's growth and inflation expectations are proving valid. This week, bonds tumbled amid concerns that new Fed chair appointee might be a softee on inflation and the deficits. U.S. bond yields also face increased competition amid stronger growth prospects (and rising bond yields) in Germany and Japan. The yield of the benchmark 10-year Treasury bond rose to 4.57% from 4.39% last week.
In terms of seasonality, stocks seem well positioned to continue moving higher through November, according to several market observers. Pado points out that the end of October also marks the end of the fiscal year for many funds. The last week of October is typically characterized by heavy selling as fund managers ditch losing positions. But window-dressing, or the purchase of winning stocks to make portfolios look better, can be expected on the last day of the month. "And then, seasonality means a lot
of traders are going to take a chance on a fourth-quarter surge," Pado says. Jeffrey Saut, Raymond James' market strategist, is also betting on the historical odds that typically take the market higher in November. However, he remains cautious about the magnitude of any upside. Selling into strength has been a hallmark of trading in October, he notes, and many of the same uncertainties that led to investor caution then are still in place now. Namely, how are consumers faring with higher energy prices, rising health care costs and a cooling housing market? At the same time, the Fed still seems poised to continue raising rates into next year. For those reasons, "I'm staying away from anything the consumer consumes and from financials," Saut says. But Saut has joined a growing group of market strategists (including Citigroup's Tobias Levkovich) who've turned bullish on large-cap stocks in recent weeks. The move is a defensive one, however, as Saut believes that the 77 months of outperformance by small- and mid-cap stocks has run its course. Still, the action this week suggests those hoping for a fourth-quarter rally shouldn't count on any market upside lasting past November, if not past Friday. Meanwhile, with the Greenspan replacement out of the way, it seems the only help Wall Street can expect from the Bush White House is when some of its officials manage to avoid indictment.