Market Perspective for October 24, 2014

Stocks enjoyed their best week in more than year as they snapped back from the recent sell-off. The top performer was the Nasdaq, which gained 5.24 percent. The S&P 500 and the Dow Jones Industrial Average rallied 4.12 and 3.14 percent, respectively. The Russell 2000 also was up strongly, increasing 3.37 percent.

A diversity of sectors broke out to new highs. SPDR Utilities (XLU) pushed to a new intraday 52-week high on Friday. The sector rallied during the sell-off, but didn’t retreat when the rebound started. The sector is benefiting from lower bond yields, and some investors still nervous following the sell-off may be hanging on to their utility shares.

Also breaking out to new highs were biotechnology ETFs. First Trust Biotechnology (FBT) and iShares Nasdaq Biotechnology (IBB) climbed to new all-time highs, while SPDR Biotech (XBI) and Fidelity Select Biotechnology (FBIOX) are both very close to new records.

Also pushing to a new all-time high is Apple (AAPL). Sales of the company’s iPhones helped the firm beat analyst earnings expectations for the quarter.

The strong performance by these varied sectors is a giant thorn in the side of the bears. Breakouts are associated with bull markets and when the leading stocks and sectors are pushing higher, it signals more upside opportunities are present. There still could be some selling ahead, but the moves will be only temporary. The activity in the market over the past several weeks appears to be a consolidation before the next move higher for the major indexes.

Economic data was generally positive this week. The flash manufacturing PMI for October slowed, but is still signaling an expansion in the sector. New home sales climbed to their highest level in six years.

This week’s rally in stocks also came amid some disappointing earnings, and the market did react negatively. IBM, Coca-Cola (KO), Amazon (AMZN), and McDonald’s (MCD) all missed estimates. This was a flip from earlier in the earnings season, when the financial sector reported very strong results, but the overall market was caught in a wave of selling. This shows how psychology often dominates the market in the short-run. Another example was the newest case of Ebola in New York, which sent stocks lower overnight, before recovering in the morning.

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