October 15, 2010: Market Summary

By Joey Fundora | October 15, 2010 AAA

In an options expiration week that also kicked off the first full earnings week of the season, the markets continued to inch higher and have now clearly separated themselves from the small consolidation formed in September. As recently as a month ago, many pundits were calling for a resumption of the primary bear market and a possible breach of the recent bear market lows. The current thrust from this summer's lows has been powerful, despite relatively lackluster volume. Markets have been clearly showing strength; just look at the Nasdaq 100, which surged to new recovery highs this week.
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Even more surprising is the fact that tech stocks, as represented by the Powershares QQQ ETF (Nasdaq:QQQQ), have been able to climb above their mid-2008 highs. This was approximately the time when the recent bear market began accelerating and the fact that the Qs have been able to recover is impressive. Much of this move can be attributed to Apple (Nasdaq:AAPL), which has been at all-time highs for several months. This week I am showing a 10-month chart; notice how QQQQ has been able to clear its April highs without much trouble. This group is clearly leading the way right now and market participants should be focused on its behavior moving forward.

Source: StockCharts.com

While the S&P 500, as represented by the S&P 500 SPDRS (NYSE:SPY) ETF, is still well below its mid-2008 highs, the group is approaching an important high formed earlier this year. SPY hit a roadblock at $122 in April, and after a swift decline, it chopped around all summer. Despite what looked like a probable breakdown, SPY ended up rallying through some resistance levels and is now a few points from its April highs. The financials continue to act poorly though, and they will need to cooperate at some point if SPY is to make a serious attempt setting this important higher high.

Source: StockCharts.com

The Diamonds Trust, Series 1 (NYSE:DIA) ETF, which tracks the Dow Jones Industrial Average, is right at its April highs, and is showing good relative strength to SPY. While DIA has a much smaller number of component stocks, it is highly watched and is an important indicator for the general markets. A breakout above the April highs would technically change the trend on the weekly charts to an uptrend.

Source: StockCharts.com

Besides volume, the other disappointment with the current market has been the relative underperformance by the small caps. The group, as represented by the iShares Russell 2000 Index (NYSE:IWM), still remains below its April highs. However, it's interesting to note that on longer term charts, the April highs are actually fairly close to the top of IWM's 2008 trading range. If IWM were to clear this level, it could set the stage for a strong move higher.

Source: StockCharts.com

Bottom Line
The move in QQQQ was an interesting development this week. By clearing its April highs, QQQQ is now in an uptrend on longer time frames due to the fact that it set a higher high on weekly and monthly charts. While many participants remain bearish on the economy, the markets are beginning to introduce some interesting possibilities. If SPY, IWM and DIA follow in QQQQ's tracks, it would set the stage for a possible end to the primary bear market that began in 2008. There is always the chance that this is a false breakout in tech stocks, and that the broader sectors will drag them back down, but for now, traders should remain open to the idea that higher prices may be on the horizon. (For more, see Technical Analysis: Introduction.) Use the Investopedia Stock Simulator to trade the stocks mentioned in this stock analysis, risk free!

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