It was another bullish week for stocks and gains are accelerating. The S&P 500 index just posted its fifth weekly gain in a row. The market has been up every week this year. Investors seemed to ignore the lack of progress with Greece and its talks with creditors. Instead the focus was on better than expected economic data culminating in a much better than expected jobs report on Friday morning. The Dow Industrials index closed at levels not seen since 2008. The NASDAQ composite has broken out to new ten-year highs. The volatility index (VIX) fell to new six-month lows. Gold posted a drop for the week and the sell-off in the dollar seems to have stalled. Meanwhile the bond market plunged on Friday's economic data and bond yields surged.

We had a very busy week for economic data. The Chicago PMI for January came in at 60.2, down from 62.5 a month earlier. Economists had been expecting a reading closer to 63. Analysts had been expecting the Consumer Confidence index for January to rise from 64.8 to 67.0 but January's reading came in at 61.1. January same-store sales data from the retailers that still report these numbers came in mixed. That's about it for the disappointing economic numbers. Almost everything else showed signs of improvement.

Wall Street was expecting the ISM manufacturing data for January to rise from 53.1 to 54.5 but the report came in at 54.1. It's a mild disappointment but still the highest level since June 2011. The weekly initial jobless claims fell -12,000 to 367,000, which was better than expected. The ECRI's leading indicator signal has risen three weeks in a row. Auto and truck sales in January set an annual pace of 14.1 million. That's the best sales month since summer 2009. In Europe the German unemployment rate fell to 6.7%, which is a new record low. British consumer confidence rose to its highest level in seven months. In Asia China's manufacturing PMI data was a bit disappointing but still came in above the 50 line, suggesting growth. China's PMI services index dropped from 56 to 52.9, the lowest level since February 2011.

The big headlines were out Friday morning. The U.S. unemployment rate dropped from 8.5% to 8.3%. The January jobs report surged to +243,000 when economists were only expecting +150,000. The ISM services index surged from 52.6 to 56.8. Economists were only expecting a gain to 53. This is the best reading since February 2011. The headline unemployment rate number of 8.3% was a bit controversial. Evidently the big decline was due to the government using updated population figures from the recent 2010 census. The new numbers allowed for a big drop in the labor force participation rate. Suddenly 1.17 million people dropped out of the labor force. At least that's how the detractors are painting the results. Since the unemployment and jobs data is seasonally adjusted there is skepticism that Friday's numbers were artificially inflated for political gain since this is an election year. At the moment none of that matters since Wall Street decided to buy the news and send stocks higher with a really big short squeeze on Friday morning.

Outside of economic data there was an ocean of digital ink spilt in the fever over Facebook's IPO. The social media giant Facebook formally announced plans for an IPO when they filed paperwork this week. Estimates suggest the IPO could value the company between $75 and $100 billion. Last year's big IPOs all pale in comparison. Groupon (GRPN) was valued at $16.5 billion. LinkedIn (LNKD) was valued at $9 billion. Video game maker Zynga (ZNGA) was valued at $6.6 billion. The closest rival for FaceBook's IPO is Google (GOOG), which came to market at $27.2 billion back in 2004. Today GOOG is valued at $193 billion.

Major Indices:

Bulls continue to stampede over the bears. Stocks rebounded off their Monday morning lows. Friday's jobs-inspired rally pushed the market to new relative highs. The S&P 500 is at six-month highs and rapidly approaching resistance near the 1,350 level. Not only is the S&P 500 up +6.9% in the first five weeks of the year but the index is up +11.8% from its mid December low when this rally actually started.

Is the market overbought? Yes. Can it get more overbought? Absolutely. Now imagine that the market is like a rubber band. The longer you stretch it out the bigger the snap back. Ideally, the trend higher continues and the index produces little -3% to -5% corrections that allow investors a chance to reload positions. Right now a -3% correction would be a dip to 1305. A -5% correction is 1,277. I still think the 1300 level offers some round-number, psychological support.

What is important here is that the trend is up and investors seem to be in a buy-the-dip mode. If the S&P 500 can breakout past 1350 then the next level of resistance is the 2011 highs near 1365.

Daily chart of the S&P 500 index:

Weekly chart of the S&P 500 index:

The NASDAQ has been a very strong performer. The composite index is up +11.5% this year already. It's up +15% from its mid December low. You can that the NASDAQ has broken out past major resistance at its 2011 highs. These are levels the NASDAQ has not seen since very late 2000. Once again, is the NASDAQ overbought? Absolutely. Can it keep going? Yes, but odds are growing every day for a snap back correction. You can see on the daily chart that the NASDAQ has rallied to the top of its narrow bullish channel. A pull back would be normal here. A typical -3% to -5% correction would mean a dip to 2,818 to 2,760. Personally, I would not chase it here.

Daily chart of the NASDAQ Composite index:

Weekly chart of the NASDAQ Composite index:

The small cap Russell 2000 index is up +12% this year and up +17.3% from its mid December lows. You can see on both the daily and weekly chart that gains are accelerating. It's unlikely that the $RUT can keep this momentum going for very long. The next level of overhead resistance is the 850-860 area. Will this index get there before reversing? I don't know but when the correction does occur you can bet the small caps are going to get hit the hardest. A typical -3% to -5% correction would mean a pull back toward the 806 and 790 levels. I would expect the 800 level to offer some psychological support.

Daily chart of the Russell 2000 index

Weekly chart of the Russell 2000 index

The economic calendar this week is very light. It makes me wonder if stocks will stall for lack of positive economic data to fuel the rally. We've got the initial jobless claims and wholesale inventories on Thursday. Michigan Sentiment and trade balance figures are released on Friday. None of these are going to be market moving events. Earnings season is winding down as well. This dearth of data will let the focus fall back on Europe and Greece's inability to make any progress negotiating with its creditors.

- Thursday, February 9 -
Weekly Initial Jobless Claims
wholesale inventory data from December

- Friday, February 10 -
Michigan Sentiment figures for February
trade balance data for December

The Week Ahead:

With nothing else to distract it the stock market might choose to focus on the problems with Greece again. What can I say about Greece that hasn't already been said? We already know the country will default eventually. The question is how long does Europe postpone this problem? The answer to that depends on how long they want to keep paying Greece's bills. A week ago Germany wanted Greece to give up control of its budget, which Greece immediately rejected. Yet the EU members that are writing the biggest checks for Greece's bailout are demanding stricter and tighter controls. They want to lay off government workers and a drop in the minimum wage. That's going to be a tough sell in Greece. It's like Germany has finally seen the writing on the wall for Greece and they're going to make new budget requirements for Greece so uncomfortable that Greece will choose to leave the euro zone, which would prompt an immediate default.

Is a Greek default a problem at this point? It would be painful but ultimately it might prove to be the most healthy for both the EU and Greece. Global markets could see a significant knee-jerk reaction to any Greek default but I am starting to suspect it would be temporary. We've been expecting Greece to go bankrupt for so long now that it might be a relief. The bigger problem is what happens after a Greek default? Portuguese bond yields have pulled back a bit this week but they remain extremely high and suggest Portugal is the next country that could crash even though they've already been bailed out once. My concern is that if Greece decides to leave the euro zone then Portugal, Ireland and Spain could be next. What will that do to the global banking system?

On a short-term basis the bond yields in Spain are ticking lower, which is good. Bond yields around the EU should continue to see pressure lower next month as well. The ECB's LTRO three-year cheap money program for European banks has been credited with solving the area's liquidity issues in addition to bringing down bond yields. It is suspected that European banks are taking this three-year 1% money and buying short-term sovereign debt at higher yields. The ECB is about to do it again with another round of LTRO money in late February. Speculation is that the ECB could lend up to $1 trillion in the next round. Meanwhile Greece continues to argue with the troika over its budget requirements for the next bailout package and it's arguing with private money investors on the details of their bond haircut. Greece has to get a deal done with the private money guys or the EU isn't going to fund the next aid installment loan. We already know that Greece has a $14 billion payment coming up in March.

Elsewhere in the world it seems the Iran/Israel conflict is heating up again. Israel continues to warn the world that we're running out of time to stop Iran from developing a nuclear weapon. Many are speculating that Israel could try some sort of surgical strike at Iran's nuclear complex before summer is over. Iran is not one to sit idly by and the country recently warned the West that a big event was coming. It sounded like more religious rhetoric about the coming 12th Imam, the Islamic Messiah. We've heard this message before yet Israel took it a step further and warned its people around the world that Iran could target Jewish facilities, including those located in North America. Why does this matter to the stock market? Any strike on Iran would send oil prices skyrocketing higher. Iran has promised to cripple the West and shutdown the Strait of Hormuz if attacked. Nearly a third of all oil tankers flow through the Strait of Hormuz. Stopping traffic there would have significant impact on the globe. The U.S. has promised they won't let Iran shut down this key shipping lane. Is this a key issue this week? Unlikely but it's in the background and probably keeping oil prices elevated.

What I would focus on is bond yields. Bond yields are so low right now that there isn't much room left for investors to make a profit. Yes, bonds are "safer" than equities but look at the stock market rally many investors have missed out on this year. It hasn't happened yet but we could see money start to flow out of bonds and into stocks. When that reversal actually happens it could fund the stock market rally for a long time. The key will be economic data. This past week we saw a handful of very positive reports. If this trend continues and the economy starts to gain momentum then investors will feel more confident owning stocks.

On a short-term basis I am concerned the market is overbought. Can it grow more over bought? Yes, it can. However, I'd prefer to wait for some sort of correction before putting any significant amount of money to work.

- James