In the Week Ahead: Is A Market Bottom Finally In Place?

By: John Kosar of Street Authority

All major U.S. stock indices finished in positive territory last week, for only the second time since Aug. 29, led by the Russell 2000, which gained 4.9%. This is good news for the market as small-cap stocks have lagged in a big way all year. The Russell 2000 is up just 0.9% year to date compared with 15.8% for the tech-heavy Nasdaq 100 and 9.2% for the broad market SP 500.

Another good sign is that, despite the Federal Open Market Committee (FOMC) announcing the end of its bond-buying program on Wednesday, the SP 500 rose by an additional 1.7% into Friday's close. This suggests that, despite a lot of investor apprehension beforehand, the market ultimately interpreted the Federal Reserve's action as evidence that it believes the U.S. economy is finally strong enough to stand on its own two feet.

From a sector standpoint, last week's rally was led by technology, up 3.3%, and financials, up 3.2%. This is another good sign for the overall market between now and year end as these sectors typically outperform amid expectations for a strengthening U.S. economy.

Technology Stocks at a Key Inflection Point

In the Aug. 25 Market Outlook, I discussed an important overhead resistance level at 4,147 in the Nasdaq 100. I said, "Major benchmark highs like this one are seldom meaningfully and sustainably broken without at least a multi-week corrective decline first."

The index peaked three and a half weeks later, at 4,119 on Sept. 19, and then subsequently declined by 10.2% into the Oct. 15 low. The SP 500 declined by 9.8% during the same period.

The Nasdaq 100 managed to edge slightly above 4,147 last week, which represents the September 2000 benchmark high, closing at 4,158 on Friday.

The more time this market-leading index spends above 4,147, the more likely that a major breakout is emerging that would clear the way for a continued rise into year end.

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