On Thursday, the S&P 500 closed at a new high and its intraday record of 1733.45 broke the all-time high set Sept. 19. Over 80% of stocks traded on the New York Stock Exchange rose. According to FactSet, companies in the S&P 500 index are on track for third-quarter earnings growth of 1.1% from last year. Excluding J.P. Morgan Chase's loss, they would be on pace for 3.6% growth. Please note that at the beginning of earnings season, analysts expected earnings growth of 3%.
Taking into account the fact that there are no technical resistance levels at the moment, it seems that stocks could continue their rally in the coming weeks or even months. Additionally, with Janet Yellen scheduled to take over as chief of the Fed, the stock market should increase as long as inflation remains low and unemployment remains elevated.
And speaking of the Fed… According to Reuters, many investors think that damage done to the U.S. economy by the 16-day government shutdown and uncertainty over the next round of budget and debt negotiations may keep the Fed from withdrawing monetary stimulus until at least a few months into next year.
The Fed's taper decision will ultimately be tied to the economic data. In the coming week all eyes will be on the crucial nonfarm payrolls report. The report was originally scheduled for release on Oct. 4, but because of the government shutdown, it will be released next Tuesday.
It seems that the U.S. debt deal and a rather unlikely reduction of Fed asset purchases are positive for both gold and the general stock market. However, let’s not forget that these two markets used to move in the opposite directions in the past few weeks. The question becomes - how will the current situation in the general stock market impact the gold market? Before we try to answer these questions, let's take a closer look at the charts to find out what the current situation in the general stock market is (charts courtesy of http://stockcharts.com).
Looking at the above chart, we see that the invalidation of the breakdown below the rising medium-term support line has indeed triggered the expected rally in the past few days. The S&P 500 rose and actually moved above its September 18 top. There was no analogous breakout in case of the Dow Jones Industrial Average, though.
The outlook is bullish and – as you will see in the section about gold & silver correlations - the implications for gold are bearish.