Market Perspective for October 20, 2014

Trading for the week opened on a mixed note. Shares in Japan surged higher by nearly 4 percent as the U.S. rally that ended last week carried into Japan. The rally stopped in Europe though, where major markets were down as much as 1 percent in early trading, hurt by an earnings warning from technology firm SAP. It will take more than a day of trading for the market to figure out which way it is heading though. Another retreat may be needed to test the lows set last week before a rally begins.

The performance of the small cap index versus the broader market will be subject to more attention. The Russell 2000 Index, which has significantly underperformed for most of the year, rallied early last week. While the S&P 500, Dow and Nasdaq were punching lower, the Russell 2000 had already bottomed and began to move higher. This rally stopped on Friday though, at the same time the broader market enjoyed a strong run. This could be random noise and one cannot make too much of one day of trading, but this could be a sign that the rally was caused by short-covering, in which case the selling may not be finished.

Volatility in the market will also be one of the top stories this week, but earnings will begin to play a larger role. Last week’s strong reports from financials helped bolster the market. This week is a blue chip bonanza. Apple (AAPL), Ford (F), AT&T (T), Bristol-Myers (BMY), Eli Lilly (LLY), Caterpillar (CAT), Amazon (AMZN), Microsoft (MSFT), Dow Chemical (DOW), Hershey’s (HSY), Proctor & Gamble (PG), Johnson & Johnson (JNJ), Coca-Cola (KO).

The coming days will be very light for economic data, with the flash PMI for October being the most important. Investment figures from China out late on Monday could move commodity markets such as copper and iron ore. As the week draws on, attention will increasingly turn to the upcoming Fed meeting, where they are expected to end quantitative easing.

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