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Greatness in October Spilling Over to November

Posted November 1, 2022 at 10:10 am
Patrick J. O’Hare
Briefing.com

October was a great month for the stock market (which needed a great month). That greatness is spilling over to November, evidenced by an equity futures market that has a positive disposition.

Currently, the S&P 500 futures are up 41 points and are trading 1.1% above fair value, the Nasdaq 100 futures are up 153 points and are trading 1.4% above fair value, and the Dow Jones Industrial Average futures are up 221 points and are trading 0.7% above fair value.

Several catalysts are working in the stock market’s favor at the moment:

  • There are unconfirmed reports that China is going to set up a “reopening committee” for its economy, which would entail an exit from its zero-COVID policy.
  • Today is the first trading day of a new month, which typically invites new inflows. The invitation looks more attractive at this point knowing how things went in October and that this is historically a seasonally strong period for stocks.
  • Longer-dated Treasury yields have dropped noticeably. The 10-yr note yield is down 15 basis points to 3.93%.
  • Johnson & Johnson (JNJ) created some M&A buzz with a $16.6 billion, or $380.00 per share, cash acquisition of Abiomed (ABMD) that translates to a 47% premium over yesterday’s closing price for ABMD shareholders.
  • Uber (UBER) is aiding the cause for growth stocks, trading up 13% after pleasing investors with its Q4 adjusted EBITDA guidance

There is an intangible factor in the trading mix, too. That would be the fear of missing out on further gains.

To be sure, the recent trend has been a friend for bullish-minded participants. The S&P 500 has climbed back above its 50-day moving average, rallying 10.9% off its October 13 low. Still, it has some work to do to break a pattern of lower highs and to alter a downward-sloping 200-day moving average (currently 4,105).

It will have to do so against a deteriorating economic backdrop that will continue to leave fourth quarter, and 2023, earnings prospects in doubt. Nonetheless, an element of the relief rally seen since mid-October is that third quarter earnings results and guidance have been generally better than feared.

That condition has been owed in part to a consumer that remains relatively strong. Uber CEO, Dara Khosrowshahi, told CNBC as much following the company’s earnings report, yet he also conceded that Uber is being cautious about 2023.

The stock market, however, is in a mode of operating in the here and now, and what it is hearing in the here and now is that earnings are still holding up better than feared and that the Fed may soon embrace a less aggressive rate-hike approach. That has made it feel better about the outlook or perhaps resigned to think that things won’t be as bad as the market’s behavior for most of this year has suggested it will be.

Accordingly, there has been a marked improvement in many stock prices that has been aided by short-covering activity and more earnest bargain-hunting activity, particularly in cyclical sectors.

The energy sector has led all sectors this quarter, soaring 24.8%. It is poised to continue to do well to start the month as the thought of China “reopening” has given a nice boost to oil prices ($88.44, +1.89, +2.2%), not to mention copper prices ($3.49, +0.12, +3.4%).

The energy sector has also been the engine behind the modest earnings growth for the S&P 500 in the third quarter. Companies are delivering some big profits. On a related note, President Biden said he is going to work with Congress to look at available options for possibly imposing a windfall profit tax on energy companies. The sector hasn’t reacted more negatively to the news because the market doesn’t believe such a proposal will pass Congress.

The energy sector is the only sector up this year (+63.2%), but with the move in October, nearly every sector has pared its losses for the year. It has been a welcome move and it could have more room to run if the Fed doesn’t spoil the hopeful party when it makes its latest policy decision known tomorrow at 2:00 p.m. ET.

Originally Posted November 1, 2022 – Greatness in October spilling over to November

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