The Dow's rise to a fresh record could signal the start of the year-end rally

Published Wed, Oct 20 20213:55 PM EDTUpdated Wed, Oct 20 20215:27 PM EDT

Patti Domm @in/patti-domm-9224884/@pattidomm

The Dow Jones Industrial Average's surge to a fresh record Wednesday sets the stage for a bounce higher for the broader market, as stocks head into what traditionally has been the best time of year. After a choppy period in early October, stocks started to move higher last week, to the point where the Dow temporarily broke into record territory Wednesday for the first time since Aug. 16. The S & P 500 was below its record but edged near its Sept. 2 high of 4,545.85. The Dow rose to a new high of 35,669.69 before giving back some gains. The Dow closed at 35,609, up 152 points or 0.4%, just shy of a record close. "The two things that were causing problems were the debt ceiling and government funding. Those things haven't been resolved, but they punted them out to December," said Randy Frederick, managing director of trading and derivatives at Charles Schwab. Frederick and other analysts said earnings have also been giving the market a boost. Early quarterly results show that more than 85% of companies beat estimates, and earnings are currently expected to grow by 33% for the third quarter, according to Refinitiv. Frederick said he was initially worried about quarterly profits, but now earnings news is a positive factor for the market. "My concern was if companies and analysts raised their expectations as the quarter went on, then perhaps the bar would be set too high and that would reduce the earnings beats. Last quarter, that didn't happen and so far it doesn't look like it's happening this quarter, either," he said. Analysts say overall concerns continue to be the resolution of the debt ceiling debate in Congress, potential Covid-19 outbreaks and the continued tick higher in the 10-year Treasury yield. Bond yields move opposite prices, and some strategists say a much bigger sell-off in bonds could be negative for stocks, particularly tech. The Federal Reserve is widely expected to announce next month that it will start slowing down its $120 billion monthly bond-buying program, which it started to keep the economy afloat during Covid. But the market is also taking that in stride. Higher interest rates, however, could be a catalyst for a pullback or pause in tech and growth stocks and an outperformance in cyclicals. "The small upstart techs are going to be challenged if rates move higher," Frederick said. "The big mega cap techs with strong balance sheets are going to do just fine." The set-up for a bigger stock move is strong. CFRA chief investment strategist Sam Stovall said the S & P 500 is likely to soon reach its high and close there. "If it does, history offers encouragement for further advances," Stovall said. He added that the market was continuing its rally from last week, which he said started with a weaker-than-expected producer price index reading and better-than-expected bank earnings . "That kicked off this rally," Stovall said. "I think it's a combination of earnings. It is month-over-month changes in inflation that looks like it is peaking out and the effect of the Covid variant is slowing down." October is often a choppy month for stocks, but the market tends to finish higher before heading into the seasonally favorable November-to-April period. The S & P 500 ended Wednesday at 4,536, about 0.2% away from its peak. If a new closing high is set soon, the 5.2% peak-to-trough decline through Oct. 4 would be the 61st bull market pullback since World War II. Stovall said stock market advances that followed those 5% to 9% declines averaged a gain of 8.4% and lasted an average 98 calendar days before the next pullback. "Favorable seasonal patterns should also help power the market to additional new highs. From the October low through the end of December of each calendar year since 1945, the S & P 500 gained an average of 7.2%," Stovall said. The biggest gain in that period was 28.1% in 1998, and the worst performance was a decline of 9.9% in 1973, he added, but there were gains 92% of the time. Robert Sluymer, technical strategist at RBC Wealth Management said the market is technically well positioned for a move higher. "It would not be surprising to see it pause and consolidate at this point first. We had a pretty big move off the lows," he said. "Our view was the market was trying to carve out a low and move above the 50-day. ... Above 4,465 was an important move for the S & P. That was the prior high we set Sept. 23." He said the next point of resistance is the former high at 4,545.85. The S & P 500 broke above its 50-day moving average of 4,441 last week. The 50-day is basically the average of the last 50 closing prices, and it is seen as a sign of positive momentum if an index or stock rises above it and holds there. "I think the uptrend is intact," Sluymer said. "I think pullbacks will be bought," he added. "If we peel the onion back, and look at what's worked, we had growth stocks get hit as interest rates went up. A lot of those stocks got oversold. You took some of the froth out of those stocks." Sluymer said he now sees cyclicals, like financials, materials and industrials leading, but growth could also gain. "Breadth is expanding in the market now and that's supportive of further upside," he said. He also said that, if stocks were to double the move of the trading range between September and October that would indicate a level of 4,832 on the S & P 500. "I think that happens in the fourth quarter." The median year-end target among strategists surveyed by CNBC i s 4,600.

Traders work on the floor of the New York Stock Exchange (NYSE), September 21, 2021.

Brendan McDermid | Reuters

The Dow Jones Industrial Average's surge to a fresh record Wednesday sets the stage for a bounce higher for the broader market, as stocks head into what traditionally has been the best time of year.