The S&P 500 closed up 0.96% for the week, at 2,099.20 on Friday, despite three straight sessions of selling. Early gains on Monday were led by the healthcare and energy sectors, as Shire Plc [NASDAQ:SHPG] announced they would acquire U.S. rare disease specialist Dyax Corp [NASDAQ:DYAX] for about $5.9 billion to gain access to Dyax's DX-2930 drug for the treatment of hereditary angioedema (HAE). Shire has already been selling its drug called Firazyr (icatibant), for treatment of acute attacks of HAE, which generated sales of $123 million last quarter. 

Hedge funds were buying energy stocks early in the week on speculation that companies are prepared to launch stock buybacks after the worst earnings season in six years, and that the Fed would become more dovish after mediocre U.S. and global economic outlooks.

The yield of the U.S. 10-Year Treasury Note jumped another 8.34% for the week to close at 2.325% on Friday, while the U.S. dollar index (DXY) surged 2.31% from the previous week, to close at 99.26, after breaking out the key technical head resistance at 98.14 on Friday. The yield of the U.S. 2-Year Treasury Note skyrocketed 22.25% to close at 0.89% on Friday, driving the yield spread between the 10-year and 2-year Treasury Notes up 2.13% to 1.44 percentage points for the week. 

The yield spread fell on Thursday to 1.37 percentage points, the lowest in six months. Falling spreads may indicate worsening economic conditions in the future, resulting in a flattening yield curve. A very low or negative spread could signal an upcoming recession.

The U.S. Commerce Department said on Tuesday that new orders for manufactured goods declined 1.0% in September, missing the forecasts for a 0.9% fall. The August figure was revised downward to a 2.1% decline, from a previously reported drop of 1.7%. The financial markets shrugged off the news despite that factory activity accounts for about 12% of the U.S. economy.

The market was antsy after Federal Reserve Chair Janet Yellen affirmed the Fed's somewhat hawkish stance on Wednesday, when she told the U.S. Congress that a rate hike in December was a "live" possibility, but not a certainty. The Federal Reserve seems determined to hike the rate this year but they admit that the pace of job gains has slowed, according to the policy statement, issued after the FOMC meeting on October 28.

The U.S. Federal Reserve received much needed good economic data, to support their views for a December rate hike, at 8:30 AM EST on Friday when the U.S. Labor Department released the nonfarm payrolls report for October showing 271,000 jobs were added to the economy, while the U-3 headline unemployment rate dipped to 5.0%, from 5.1% in September. Wall Street economists were way off with their forecasts, as the consensus expectations were only for a 180,000 jobs gain with the unemployment rate remaining at 5.1%.

The August and September figures were revised by a combined 12,000 more than previously reported. The U-6 rate, that includes all the jobless plus people marginally attached to the workforce and those employed part-time because of a weak economy, fell 0.2 percentage points to 9.8%. The labor force participation rate in October remained at a 38-year low of 62.4%, meaning about 94.5 million Americans, 16 years and older, did not have a job and were not actively trying to find one.

The federal funds futures, traded on the Chicago Mercantile Exchange and commonly used to estimate the market’s views on the likelihood of changes in U.S. monetary policy, indicate 30.3% odds for a quarter-point rate hike and 69.8% odds for a half-point rate hike at the Fed's December FOMC meeting, according to data from the CME Group as of November 6. 

As of November 3, there are 166,740 short positions of S&P 500 consolidated futures, traded on the Chicago Mercantile Exchange by leveraged funds, a decrease of 1,773 short positions from the previous week. This is compared to about 60,347 long positions, down 1,999 from the previous week, according to the Commitment of Traders (COT) data released by the Commodity Futures Trading Commission (CFTC) each Friday. 

Hedge funds were undecided on the direction of the index during the week ending November 3, ahead of the nonfarm payrolls report, resulting in a small decrease of net short positions of 226 contracts, worth about $118 million, where contracts of S&P 500 futures are traded in units of $250.00 x S&P 500 index. 

The best performing S&P 500 sectors for the week were Financials and Energy, which surged 2.68% and 2.41%, respectively. Although the yield spread between the 10-year and 2-year Treasury Notes has been narrowing, investors were piling into the banking sector as they believe that the profitability of institutions in the banking sector increases with interest rate hikes. 

In theory, the spread between the long-term and short-term rates needs to expand in order to increase the bank's net interest margins, as banks borrow cash at short-term rates and lend at long-term rates. Of course, if the rate hike is due to the strengthening of the U.S. economy, financial institutions will do well regardless. 

The gains of the energy-sector stocks earlier in the week were cut in half after the big nonfarm payrolls report surprise on Friday, sending the spot WTI crude oil price, traded inversely with the U.S. dollar, tumbling 4.08% to close at $44.52 per barrel. 

The worst performing S&P 500 sectors for the week were Utilities, Consumer staples and Telecommunication services, which were down 3.57%, 1.63% and 1.53%, respectively. Although sectors such as Consumer staples and Healthcare are less sensitive to interest rates, the high dividend yielding utilities and consumer staples stocks that have been considered an attractive alternative to bonds, are becoming less attractive for income investors in a rising-rate environment. 

Shares of Time Warner [NYSE:TWX], top constituent of S&P 500 Telecommunication services and owner of Turner networks, HBO and Warner Bros. Film, tumbled 8.59% after the company cut its profit expectations for 2016.

Technically, the S&P 500 pulled back from the upper trendline resistance of the symmetrical triangle (SYM TRI) chart pattern and closed well above the 200-day SMA. One should be cautious as the RSI and MACD are now at, or near, peak levels. The yield of the U.S. 10-Year Treasury Note and U.S. dollar index are about to test the head resistances at 2.38% and 100, respectively. We expect the S&P 500 to grind higher as sector rotations and the short covering rally continues.

S&P 500 Summary: +1.96% YTD as of 11/06/15 
Barclay Hedge Fund Index: +0.65% YTD 

Outperforming Sectors: Consumer discretionary +12.76% YTD, Information technology +8.06% YTD and Healthcare +4.68% YTD.

Underperforming Sectors: Consumer staples +0.99% YTD, Financials –0.19% YTD, Industrials –2.04% YTD, Telecommunication services –3.67%YTD, Materials –6.76% YTD, Utilities –10.83% YTD and Energy –12.34% YTD.

S&P 500 ANALYSIS