Stocks broke out of their summertime trading range, and the question now is whether the market can hold on to September's record-setting gains.
With the past week's 2.4 percent gain, the Dow Jones Industrial Average is now up 8.44 percent for the month and is on track for its best September since 1939. The Dow, at 10,860, is up 11.1 percent so far for the third quarter, which ends Thursday. The S&P 500, up 9.5 percent in September, closed above the tough, 1130 resistance level twice in the past week, a signal to some traders that the market may be set to trade in a new higher range. (Get Dow 30 quotes here.)
"Ultimately, the big deal is going to be whether the economic growth rate is really accelerating in the fourth quarter or whether it doesn't," said James Paulsen, chief strategist at Wells Capital Management. "In the short run, these technical levels matter. There's no way to get to 1200 unless you break through what's been the overhead resistance to the trading range since May."
"If I'm worried about anything I am worried a little about the earnings season, only because you had a weak quarter...I'm watching the GDP revisions leading up to the earnings reports. If people are revising down their growth, you generally get a disappointing earnings season. If they're revising up, that's a good sign," he said.
There is a smattering of data in the coming week, including ISM manufacturing data, consumer sentiment readings and monthly auto sales.
Economists are watching the personal consumption expenditure data on Friday, since it is a gauge the Fed looks at as a measure of inflation.
The Fed, in the past week, was the biggest driver of markets, after it promised it would move on quantitative easing, or QE, if the economy warrants it.
The dollar went into a tail spin, losing 3.4 percent against the euro and nearly 2 percent against the yen. For the week, Treasurys were slightly higher, with the 10-year yielding 2.610 percent.
Gold rose 1.6 percent to a record $1,296 per troy ounce, and silver jumped 2.9 percent to $21.38 per ounce, a 30-year high. Oil rose 2.1 percent to $76.49 per barrel as the Fed's comments sent buyers into commodities. Some economists believe the Fed will use its Nov. 3 meeting to announce QE, which would likely be the purchase of a significant amount of Treasury securities by the Fed in an effort to push lending rates even lower.
Some of the economic data also was a bit better than expected in the past week, including Friday's durable goods, which had been disappointing last month. "It was the report that hit forecasting the hardest. Now everybody's wiping their foreheads," said Credit Suisse economist Jonathan Basile.
Basile said the durable goods report, which showed a 1.3 percent decline in August, was actually better than expected because it showed core capital goods orders gained 4.1 percent. "Firms went from major destocking to a little restocking. Then they wet to understocked, to just about right," he said.
September's strong market performance was a surprise to many strategists who had expected the usually tough month to be turbulent on the downside. The question in the next week is whether fund managers will sell to capture their September and third quarter gains, or ride it out into October.
"Our target has been 1100 to 1140 (on the S&P), which would be a pretty flat market," said Scott Wren, of Wells Fargo Advisers. "I think you're in for a period of the stock market working its way higher but at a very modest pace. I think you're going to see a lot of volatility between now and the end of the year, but it wouldn't surprise me to see a pull back here. We're a little cautious in the near term."
Brian Dolan, strategist with Forex.com, said the final days of September could bring an even weaker dollar. (Get currency quotes here.)
"It's month-end. It's quarter-end, and it's going to get a little bit sloppy here. In terms of those kind of flows, in terms of the gains we've seen in U.S. shares, there's probably going to be a need for greater selling on the month end date. It'll probably lead up into that. Certainly the dollar is on its heels at the moment. It's not going to take much to push that," he said.
"We're at some major market levels...1150 in the S&P, $1.35 in the euro and it was $1,300 for gold. We need to surpass those levels to see further immediate gains. There is the risk of some consolidation in the next week," he said.
In the Treasury market, traders are watching the auction of $100 billion in 2-year, 5-year and 7-year notes Tuesday through Thursday.
The week's data includes the S&P/Case Shiller home price index and consumer confidence, both released on Tuesday. Thursday's numbers include revisions to second quarter GDP, the Chicago Purchase Managers' index and weekly jobless claims. Friday's reports include consumer spending, ISM manufacturing, and construction spending. There are also personal income and spending numbers and the core PCE deflator Friday.
Other events this week include the first meeting of the Financial Stability Oversight Committee on Friday. That group is headed by Treasury Secretary Tim Geithner, and includes Fed Chairman Ben Bernanke; Securities and Exchange Commission Chair Mary Schapiro; FDIC Chair Sheila Bair, and Commodities Futures Trading Commission Chairman Gary Gensler, among others. The FDIC also has an open board meeting Monday. Its agenda includes discussion of how, under new financial regulatory rules, a large financial firm could be liquidated if it is a risk to the system.
Bernanke also speaks on Thursday at a town hall meeting with educators in Washington. Other Fed speakers include Atlanta Fed president Dennis Lockhart on Tuesday' Minneapolis Fed President Narayana Kocherlakota; Philadelphia Fed President Charles Plosser, and Boston Fed President Eric Rosengren, all speak Wednesday. The New York Fed's William Dudley speaks Friday morning at a journalism conference, and Dallas Fed President Richard Fischer speaks Friday on the economy.
Dolan said he is also watching Chinese purchasing managers' data Wednesday and Friday and the August leading index early in the week. The Japanese Tankan survey is released on Wednesday. European finance ministers meet at the beginning and European Central Bank President Jean-Claude Trichet is expected to speak.
About $20 billion in investment grade corporate bonds were issued in the past week, bringing the monthly total to about $88.8 billion, according to Thomson Reuters IFR. For the quarter, about $217.4 billion has been issued and $535.2 billion for the year-to-date.
Another $20 billion is expected in the week ahead, according to Lisa Coleman, head of the investment grade corporate credit team at JPMorgan Asset Management.
Coleman pointed to an interesting trend in corporate credit. Investors are snapping up investment grade debt at a seemingly faster rate than it is coming to market. "If we had about $450-$460 billion, between maturities and tenders, net supply was looking more like $90 billion. Then if you had also taken into account what's going on with coupon flow, we're actually in a net negative supply situation for the U.S. this year," she said.
At the same time, corporate bonds have become a highly desirable asset class and have seen inflows of about $100 billion into investment grade this year.
"It means we have incredibly positive technicals. The supply demand picture is positive," Coleman said. She also said the weaker economy is not a problem for corporate bond investors.
"A slow growth environment is actually pretty good for investment grade corporates because it keeps them from doing things that are too shareholder friendly and that's what we want to see as bondholders. Most of these companies have room to increase their dividends and buy back some shares," she said.
She said the $4.75 billion 3-year issue from Microsoft this past week was interesting. "They issued at 25 basis points over Treasurys. The coupon is less than 1 percent. Here's the better part-not only did they issue at those levels but the bond spreads over Treasurys have tightened since the issuance," she said.
The Microsoft debt offer also highlights an interesting issue. The company has a huge cash hoard and like many other U.S. companies, it keeps cash expatriated because of high U.S. taxes. At the same time, it can easily tap the debt markets for extremely low cost capital. In Microsoft's case, it raised capital it planned to use to pay dividends.
Corporations have been looking for tax relief from the government to repatriate that cash, which totals more than $1 trillion.
What Else to Watch
Even as a number of tech companies warned about softer revenues, the Standard and Poor's tech sector was one of the best performing sectors in the past week, gaining 2.8 percent. Apple continued to set new highs in a move toward 300.
The latest challenger to i-Pad will be released Monday, when Research in Motion unveils its new tablet at a developers conference. RIM stock was up nearly 5 percent in the past week.
Hewlett-Packard , still in need of a CEO, holds a meeting with analysts Tuesday.
There are also a few earnings, including Jabil Circuit and Paychex Monday; Walgreen Tuesday.
Family Dollar reports Wednesday, while McCormick and Accenture report on Thursday.