Stocks on Track for Best Month in 37 Years as Traders Watch Data on Consumer

Stocks could take a breather Friday as the massive Europe-driven rally puts the market on track for its best monthly gain in 37 years.

Caroline Purser | Photographer's Choice | Getty Images

October is notoriously volatile, and this month was exceptionally so, with the Dow on track for its best October ever. After tacking on a 2.9 percent gain Thursday, the Dow is up 11.9 percent for October so far, its best monthly performance since January, 1987. The S&P 500, up 3.4 percent Thursday, is now up 13.5 percent for October, its best monthly gain since 1974. The Dow closed at 12.208, its first close above 12,000 since August, while the S&P closed at 1284, about 10 points above its 200-day moving average.

Stocks and other risk assets rallied hard Thursday after European officials struck a deal to boost the fire power of their bailout fund and reached an agreement for private investors to take a 50 percent loss on Greek debt. Stocks and commodities markets, correlated closely with the euro, roared higher in lockstep, as the euro gained more than 2 percent against the dollar. Behind that gain was a big short squeeze as traders who were short the euro, raced to cover.

"It was maximum pain for the shorts," said Boris Schlossberg of GFT Forex. "At the end of (Wednesday's) European trade, it seemed everyone and their mother was going to short the euro at 1.40-1.41. Everyone was dead certain that 1.40 was resistance in the euro, and this was all baked into the cake." The euro was at 1.4188 in late New York trading.

"We are reaching a point of exhaustion. It's going to have to digest these gains for the next couple of days, at least. The bloom is off the rose. All of the (European) political procedures have been done and the focus is going to be back on the economics, and I think the economics are problematic at best. They definitely bought themselves some time and pacified the markets," said Schlossberg.

Traders Friday will focus on U.S. economic data, after Thursday's third quarter GDP report showed the economy grew at its best pace in a year. The 2.5 percent growth was in line with economists expectations, but they noted that personal consumption came in higher, up 2.4 percent, about a half percent better than expected.

Friday's data looks directly at the state of the consumer. There is personal income and spending and the employment cost index, both at 8:30 a.m. ET. Consumer sentiment is at 9:55 a.m.

"I think if the economic data and earnings data continue to come in the way they have been for the last couple of months, and Europe doesn't backtrack on some of the accomplishments they've seen in the last couple of days, I think we could continue to rally into the middle of November," said Burt White, chief investment officer at LPL Financial. White said the market could then stumble if the Congressional Super Committee does not show serious progress in finding the required $1.5 trillion in budget savings by late November.

Some traders expect to see the market pull back soon and consolidate after big gains. Birinyi Associates Thursday released a note saying by its metrics, the market looks the most overbought it has been in 12 months. Birinyi is still positive on the market but would look for a pull back to add to positions and would lighten up on some holdings.

CNBC data specialist Giovanny Moreano notes that going back to 1996, there were 38 times where the S&P 500 gained more than 3 percent in a day. About 62 percent of the time, the index was down the next day, for an average loss of 1.8 percent. (20 of those 3 percent plus moves were in the 2008/2009 period).

Brian Belski, chief investment strategist at Oppenheimer, expects the market to continue moving higher, toward his year end target of 1325. "What I credit is the indiscriminate selling of stocks in August, which caused growth stocks to be undervalued. That's what this whole rally has been. Everyone knows this Europe thing was going to be resolved because it had to be resolved," he said.

"...Unfortunately, a lot of investors were not able to see the forest for the trees when the the market was at 1100. The market is not as attractive...from a longer term perspective, we think U.S. stocks and U.S. companies are in the best position fundamentally to outperform for the next three to five years," he said.

What Else to Watch

Major earnings Friday include Chevron , Merck , Total, Aon , Newmont Mining , Whirlpool , Weyerhaeuser and Borg Warner . Newell Rubbermaid , Rockwell Collins and Goodyear are also reporting.

Groupon management take their road show to New York Friday, ahead of next week's IPO.

Follow Patti Domm on Twitter: @pattidomm