The stock market absorbed a lot of headlines last week. Through it all investors remained bullish and bought the dip on Tuesday. End of quarter window dressing may have played a key part in the stock market's rally past 1300 but no one's complaining. Overall the S&P 500 ended the first quarter of 2011 with a +5.9% gain. It was the best Q1 performance since 1998.

Looking back at some of the headlines, investors are still nervous about Europe. Standard & Poor's downgraded both Greece and Portugal's debt ratings. Some of the economic data this past week was mixed. U.S. factory orders were disappointing with a 0.1% decline. Consumer confidence fell to a four-month low. The Chicago PMI report for March was slightly ahead of expectations at 70.6. The weekly initial jobless claims remain under 400,000. The ISM manufacturing index slipped from 61.4 to 61.2. Oil continued to climb and closed at two-year highs near $108 a barrel. The Libyan rebels are struggling to make any progress and the situation could turn into a long, drawn out civil war. The U.S. plans to end its participation soon. Meanwhile the damaged Japanese nuclear reactor is still leaking tainted water into the Pacific ocean.

There are growing concerns about inflation. An interview with Wal-mart's (WMT) top management reaffirmed that we should expect higher inflation soon. Meanwhile there were several FOMC governors speaking out this past week with differing opinions on what the Federal Reserve's next step is. Of course the biggest headline last week was the March jobs report. Economists were expecting an increase of +185,000 jobs. The nonfarm payroll number came in at +203,000. Private job growth hit +230,000. The unemployment rate ticked down to 8.8% but this decline is probably being impacted by workers losing their unemployment benefits and no longer being counted. There are more and more pundits talking about the slow but steady improvement in the labor market and the market reacted with gains for the first day of the second quarter. Big picture the jobs number is improvement but it's not enough. We need about 125,000 to 150,000 new jobs a month just to keep up with population growth.

The S&P 500's almost 6% rally for the first quarter was completely recovered in the last two and a half weeks of March. Stocks are now short-term overbought and the S&P 500 is nearing the 2011 highs near 1344 and likely resistance at the 1350 mark. Stocks probably need a rest. That could mean a pull back or that could mean a sideways consolidation. On a short-term basis the 1320 and 1300 levels should be support. If the S&P can breakout to new relative highs then it's probably looking at resistance in the 1365-1370 zone before it reaches the 1400 level.

Daily chart of the S&P 500 index:

The NASDAQ is up +7.1% off its March lows and the tech-heavy index is nearing resistance at the 2800 level. While the trend is up we should probably expect some sort of consolidation here too. Look for short-term support near the 2750 area.

Daily chart of the NASDAQ Composite index:

I am concerned about the action in the SOX semiconductor index. Chip stocks tend to lead the NASDAQ higher or lower. This hasn't been the case lately but SOX may end up being an anchor weighing down the rally. The March rebound has stalled at technical resistance near the 50-dma. Now chips look poised to correct lower again.

Daily chart of the SOX semiconductor index:

One of the most bullish indicators in the market is the strength in small cap stocks. The Russell 2000 index (and the IWM ETF below) has broken out to their best levels since 2008. A bullish breakout higher in small caps is very encouraging but I want to point out that the small caps have hit what might be resistance at the prior channel's trendline. Don't be surprised to see a pull back here but the close over 840 is a big positive for this market.

Daily chart of the IWM Russell 2000 ETF:

Another positive for the markets is a two-year high in the transportation index. It's pretty impressive the transports can rally with oil at two-year highs. They do look a little short-term overbought so it's time for some profit taking. However, if the transports can keep this up trend alive it's a bullish signal for the Dow Theory crowd. The index is nearing its all-time highs.

chart of the Dow Jones Transportation Index:

The economic calendar this week is pretty small. The Fed minutes on April 5th might make headlines. The ISM services and wholesale inventory numbers are probably the two biggest releases.

On a short-term basis the stock market's trend is up. Lately the first few days of the month tend to be bullish as fund managers put new money to work. We do need to be aware that the Q1 earnings season will start in a couple of weeks. I've said it before. This earnings reporting season could be pivotal in keeping the rally alive or sparking another correction. Investors are expecting goods news from corporate America but if results and guidance don't match up with what's already baked into the market then we'll definitely see some profit taking. Something that might be unique this earnings season is the effects of Japan. Will businesses blame a bad quarter on Japan's disaster? How will the market react to this sort of news?

We also want to keep an eye on the U.S. dollar. Long-term the country's too big to comprehend debts will crush the dollar but there are some market pundits suggesting the dollar may have found a short-term bottom. If the dollar can rally it would be bearish for commodity prices but this would have a positive influence on our inflation worries. I'm still concerned about how the financial markets will react to the end of QE2 in June but that's three months away. The trend for the market is higher but stay cautious. Until the major indices get past their 2011 highs there is a chance we'll see a bearish double top pattern develop.

- James