Last Week in Brief: October 31

October 31, 2014

Hope you enjoyed a spooky Halloween weekend. It's the one time of the year you can enjoy a fireside cocktail with Sideshow Bob, Boomer Esaison, an escaped convict and a ten-foot clown on stilts and know that you won't soon wake from a Salvador Dali fever dream.
It may have been Halloween, but stocks were not spooked last week. Appearing nonplussed over Ebola in NYC, ISIS aggression, the end of QE3 and economic palpitations in Europe and Asia.
Global equities advanced in a hurry. Propelled by strong U.S. GDP, falling energy prices and a surprise Japanese stimulus announcement.

So, the million-dollar question becomes, is the correction finished? Sure looks like it. Yet, historically speaking, maybe not. Because market corrections typically occur in distinct stages involving three to five legs.
The first move frays investors' nerves. Bears load up on short positions. And sentiment quickly shifts from bullish to bearish. That occurred two weeks ago.
The next leg is an oversold bounce forcing short sellers to cover. Often at a loss. Bulls scramble to reenter the game. Sentiment shifts quickly back to bullish. That sums up our current status.
The third leg typically involves a retest of the first leg's lows. Usually occurring quickly and uncomfortably. Often brings bulls to cry "uncle!"
That third leg should be next. Though we've no guarantees. If it comes, the S&P 500 will likely drop to the October 15 low of 1,860. Yes, we reached an intraday low of 1,820, but the closing lows tend to hold more technical sway. At that low, the index had lost 7.9 percent.
Last week's bounce recovered nearly 60 percent of the decline. Left investors feeling pretty sanguine. But what follows is anyone's guess. Our point? Don't panic if markets begin to retrace the recent correction. In fact, it would be healthy from a technical perspective. Would likely set the stage for a significant year-end rally.
Either way, we believe the market wants to get through the midterm election (one of the silliest political affairs we've seen) and may then race higher. We've repeatedly mentioned that we have entered a statistical sweet spot for stocks. Made all the better historically when transpiring amid a midterm election.
By the way, a source tells us that October 27, 28 and 29 tend to be among the most effective calendar spots to buy stocks and glean a reliable five-day gain of 1.1 to 1.7 percent.
Finally, Americans will head to the polls this Tuesday for the nation's midterms. But, based on what I've seen from the fortunes spent on a myriad campaign ads, my expectations are not high. Regardless the outcome.
Few politicians run on ideas. Instead, they trash opposing candidates. Always trying to prove a negative. How evil their opponent is. The insanity of an opponent's past relationships. The fact that he kicked the neighbor's dog 23 years ago.
Which reminds me of a story...
While walking down the street one day a corrupt Senator was tragically hit by a car and died.
His soul arrives in heaven and is met by St. Peter at the entrance.
"Welcome to heaven," says St. Peter. "Before you settle in, it seems there is a problem. We seldom see a high official around these parts, you see, so we're not sure what to do with you."
"No problem, just let me in," says the Senator.
"Well, I'd like to, but I have orders from the higher ups. What we'll do is have you spend one day in hell and one in heaven. Then you can choose where to spend eternity."
"Really? I've made up my mind. I want to be in heaven," says the Senator.
"I'm sorry, but we have our rules."
And with that, St. Peter escorts him to the elevator and he goes down to hell.
The doors open and he finds himself in the middle of a green golf course. In the distance is a clubhouse and standing in front of it are all his friends and other politicians who had worked with him.
Everyone is very happy and in evening dress. They run to greet him, shake his hand, and reminisce about the good times they had while getting rich at the expense of the people.
They played a friendly game of golf and then dine on lobster, caviar and the finest champagne.
Also present is the devil, who really is a very friendly guy who is having a good time dancing and telling jokes.
They are all having such a good time that before the Senator realizes, it's time to go.
Everyone gives him a hearty farewell and waves while the elevator rises.
The elevator goes back up and the door reopens in heaven where St. Peter is waiting for him. Now it's time to visit heaven...
The Senator joins a group of contented souls moving from cloud to cloud, playing the harp, and singing. They have a good time and, before he realizes it, the 24 hours have gone by and St. Peter returns.
"Well, then, you've spent a day in hell and another in heaven. Now choose your eternity."
The Senator reflects for a minute, then he answers: "Well, I would never have said it before, I mean heaven has been delightful, but I think I would be better off in hell."
So St. Peter escorts him to the elevator and he goes down, down, down to hell...
Now the doors of the elevator open and he's in the middle of a barren land covered with waste and garbage. He sees all his friends, dressed in rags, picking up the trash and putting it in black bags as more trash falls from above.
The devil comes over to him and puts his arm around his shoulders.
"I don't understand," stammers the Senator. "Yesterday I was here and there was a golf course and clubhouse, and we ate lobster and caviar, drank champagne, and danced and had a great time. Now there's just a wasteland full of garbage and my friends look miserable. What happened?"
The devil smiles at him and says, "Yesterday we were campaigning, Today, you voted. Deal with it."
. . .
Weekly Results
Major markets finished higher last week. The DJIA rose 3.48%, the S&P 500 gained 2.72%, and the Nasdaq advanced 3.28%. Small cap stocks rose 4.89%. And the 10-year Treasury bond yield rose six basis points to 2.33%. Gold fell $59.81 per ounce, or 4.86%.

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