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Fed Driven Rally Continues the Overextended Market - Weekly Market Outlook

|Includes: QQQ, SPDR S&P 500 Trust ETF (SPY), VXX, VXZ
Apparently the secret formula for bullishness is quantitative easing. Never mind the fact that the Fed's decision to (further) lower interest rates doesn't directly create jobs, nor does it prompt a bank to suddenly determine a potential borrower is more credit-worthy.  The market just wanted to see evidence that the Fed was ahead of the curve, and Bernanke delivered. Boom - stocks gained 3.6% last week, most of it on Thursday.

But is there any longevity to the uptrend? Bluntly, you'd be hard-pressed to even call it a trend. It was more of a one-hit-wonder that just happened to drive the market further into an overbought situation. But hey, the market's rallied right through worse.

We'll look at the indices and odds below, right after a run-down of last week's and this week's economic data.

Economic Calendar

There's too much data from last week to look at all of it; we'll just hit the highlights, starting with personal income and personal spending. The former was down 0.1% for September, while the latter was up 0.2%. Correspondingly, consumer credit levels were up by $2.1 billion.... the first increase in many, many months. Back to the norm of "spend more than you make."

On the jobs front, the bigger trend showed marked improvement, even if the near-term trend slumped a bit over the last couple of weeks.

The ADP Employment Change of net +43K jobs coincided with the 151K increase in nonfarm payrolls for October...both well above expectations, and both the strongest showing in quite some time. Unemployment held steady at 9.6%.

More recently, the previous week's initial unemployment claims popped to 457K (which is in the middle of the recent range of readings), while ongoing claims from two weeks ago drifted a hair lower to 4.34 million. Despite the modest panic, the new claims level isn't all that remarkable.

The rest is cited on the table below.

Economic Calendar

As for the coming week, it should be much less hectic. Only a handful of numbers are in the cue, and none of them are earth-shattering. We won't even bother with a preview; just look at the lower half of the above calendar.

S&P 500

What is there to say about the S&P 500 (NYSEARCA:SPY) (SPX) that would mean much in the way of an outlook? Last week was all about the Federal Reserve inducing a rally. Fundamentals didn't matter. Earnings didn't matter. Technical momentum - or lack thereof - didn't matter. The market pretty much demanded Bernanke do something, and he obliged. The question from here is, how much mileage can stocks get out of what should largely be a pointless action (QE) from the Fed?

Unfortunately, the answer is "not much" if previous emotionally-driven rallies are any clue. At some point the market has to justify its value.

In any case, the gravy train may have already stopped, with the S&P 500 back at the upper Bollinger band (purple) that's been such a problem going as far back as early 2009.

On the other hand, we need to at least acknowledge that the upper band line isn't necessarily a bearish reversal point - it may only be the area where the incredible rally slows down.... like we saw in October.

Simultaneously, the VIX (NYSEARCA:VXX) (NYSEARCA:VXZ) stopped its downward move at its lower Bollinger band, suggesting confidence in the rally at this point is low.

So a pullback is in the cards? We're due a pullback, but we were due a pullback in late October and the S&P 500 continued to rally anyway. [As John Maynard Keynes said, "The market can stay irrational longer than you can stay solvent."] So, as for how to proceed from here...

The market is overextended now no matter what; look for a pullback to some degree early this week. How far? That depends.

Until the 20-day moving average line (blue) at 1185 - and rising - breaks down as support, there's no valid reason to assume the implosion is nigh. Of course, after the 16% runup since September's low, any implosion could be a hefty one when and if it gets rolling.

On the flipside, don't rule out more upside. If a small retreat can cool the rally off enough to bleed off some of this overbought pressure (a dip to the 20-day line would do the trick), the bulls could regroup and restart the uptrend pretty nicely.

The last thing the bulls want to see happen here, however, is for the market to pop even just moderately above the upper Bollinger band. Such a move could be interpreted as a blowoff top.... a last hurrah, of sorts. Be leery of such a move,

In the meantime, the market's in limbo. You may want to stay on the sidelines until we get a little more clarity.

S&P 500

Sector Performance

After a multi-week slump, financial stocks finally took off and led last week's gains. Given how badly they'd underperformed since mid-September, any marketwide bullish tide should continue to prove very fruitful for the group.

On the losing end of the spectrum were health care stocks, though they still ended the week with a small gain.

Sector Rank

Here's a look at how each sector has been accelerating or decelerating since the late-April top. The remaining upside for the financial sector is clear here. And, it's also clear with this graphic that telecom remains stretched thin.

Sector Comparison

Industry Performance

No major surprises here, considering the leading and lagging sectors. Banks blazed the trail for financials (NYSEARCA:XLF), and biotech pulled health care stocks lower.

That said, some of the best and worst from last week are newcomers... and made big reversals that may be the beginning of trade-worthy trends. Take the 13% pop from the construction materials group for instance, which is still one of the biggest losers from any prior timeframe. Conversely, broadcasting stocks finally got knocked off their bullish perch, yet still have plenty of room to slide lower.

Industry Rank

Earnings Calendar

You'll see a noticeable change in the length of the earnings calendars from this point on, indicating we're now past the heart of earnings season. There are still some game-changers in the lineup though.

As for how the market fared so far (with 80% of companies reporting), about 67% of companies topped their EPS estimates, and 61% beat their revenue estimates. That's pretty much the norm. 

The most surprises came from the consumer discretionary and technology sectors. A full 82% of consumer discretionary stocks beat estimates, while more than 91% of technology companies topped last year's earnings.

Technology stocks (QQQQ) also saw the biggest revenue increases; 96% of these companies beat last year's comparable revenue levels. The financials generated the most beats of revenue estimates, with 87% of its stocks doing more sales than expected.

Here's what's in store for this week.

Earnings Calendar

Trade Well,
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Disclosure: No positions.