Friday was the third birthday for the current bull market in stocks. The major U.S. indices are up +100% off their lows three years ago. The rally continued this week in spite of Tuesday's decline, the worst one-day drop this year. Traders bought the dip and the S&P 500 index eked out a +0.1% gain for the week, marking its 9th advance out of the last ten weeks. Major headlines for the week included Apple Inc. (AAPL) launching its latest iPad. Greece saw more than 80% of its private sector investors agree to a massive write off in the value of its debt allowing the country to force the remaining bond holders to accept the same deal with their collective action clauses. This in turn sparked the ISDA to rule that a "credit event" had occurred and would trigger the associated credit-default swaps.

Economic data last week was mixed. The European Central Bank left interest rates unchanged at 1.0%. The Bank of England followed suit and left their rates unchanged at 0.5%. The Eurozone Q4 GDP estimate came in at -0.3%. Meanwhile China saw the number of bank loans, retail sales, and PMI data all come in lower than expected. The Chinese government lowered their 2012 GDP growth target from +8.0% to +7.5%, the lowest target in eight years. The China news combined with negative EU GDP numbers sparked concern about a world-wide slowdown.

Here in the U.S. we saw factory orders fall -1.0% versus estimates for a -1.9% reading. Consumer credit grew from $16.3 billion a month ago to $17.8 billion when economists had been expecting a decline. The ISM services index hit a new one-year high at 57.3 up from 56.8 the prior month. There was some concern that the ISM services prices paid component surged to the highest level since March 2011. There has also been an increased focused on gasoline prices and thankfully gas prices finally pulled back after almost 40 days of nonstop gains. Meanwhile the weekly initial jobless claims snapped a three-week trend of sub-360,000 numbers with a rise to 362,000.

The biggest economic report of the week was the February nonfarm payrolls jobs number. Economists had been expecting the U.S. economy to show a growth of +210,000 jobs. The Friday morning report came in at +227,000. Furthermore the government revised January higher from +243K to +284K and revised December higher from +203K to +223K. Unfortunately the official U3 unemployment rate did not move at 8.3% because almost 500,000 people rejoined the workforce and started looking for jobs again. Friday's report continues to show improvement for the labor market but it's very slow. The U.S. needs at least +150,000 new jobs a month just to keep up with population growth and immigration. With millions of citizens out of work it's going to take a long time to get back to "normal" employment whatever the new normal might be.

Contrary to what the Apple marketing team might tell you the biggest event of the week was the final vote on Greece's private sector bond debt swap. Greece had to get this done to qualify for the latest 130 billion euro bailout. More than 80% of investors agreed to a massive haircut in their current Greek bonds and swap them out for new ones. This high percentage of positive votes in favor of the debt swap allowed Greek to enact their collective action clauses and forced everyone else to take the same haircut.

The International Swaps and Derivatives Association (ISDA) declared that this forced restructuring of debt qualified as a credit event and investors holding credit-default swaps (CDS) could call them in. Fortunately it is estimated that only 3.2 billion euros worth of un-hedged debt remains compared to tens of billions a couple of years ago. The ISDA announcement put a wet blanket on the market's rally on Friday, prompting traders to take profits on a three-day bounce in stocks.

Why is this ISDA announcement important? If they had not declared this a credit event that allowed debt holders to trigger their CDS then it would undermine the entire global CDS market. There are trillions of dollars worth of CDS contracts out there where investors have purchased insurance on sovereign debt. If suddenly Greece can force bond holders to take less than 100% of what they are owed and it's not a credit event then why pay for these CDS contracts in the first place? Not only would the major banks be losing money on writing these CDS contracts but several European countries (e.g. PIIGS) would no longer be able to sell debt if investors could not buy insurance on it.

Major Indices:

The major U.S. indices came back from the brink. Tuesday's drop was a clear breakdown of the narrow up trend off the December lows. Yet there was no follow through. Traders bought the dip again and now the S&P 500 is testing its multi-year highs set a week ago. The market's resilience here is encouraging but this index remains overbought. Currently the S&P 500 is up +9.0% year to date. Right now I am concerned that if the S&P 500 does not breakout past last week's highs in the 1375-1378 zone it will be seen as a short-term bearish double top.

Last week I cautioned readers to look for support near 1340, which is exactly where the S&P 500 stopped on Tuesday. If the 1340 level breaks on a new decline we can look for potential support the 50-dma (near 1327), the 1320 level and the 1300 level.

Daily chart of the S&P 500 index:

The NASDAQ composite has seen a similar recovery with a +3.0% bounce off its Tuesday lows. Last week I pointed out that the 2900 level was likely support. Now the NASDAQ is testing its multi-year (decade) highs near round-number, psychological resistance at the 3,000 level. I do not believe the dip from 3,000 to 2,900 was enough to alleviate the index's overbought condition but if the NASDAQ can breakout past 3,000 it could start a new round of short covering. A failure here would look like a short-term bearish double top.

Daily chart of the NASDAQ Composite index:

The action in the small-cap Russell 2000 index might be more significant. After almost a month of consolidating sideways the $RUT broke down and was trading under both the 800 level and its 50-dma. Yet the three-day bounce has fueled a +3.8% rebound lifting the $RUT back into its prior trading range. You can also see on the daily chart below that this is a rebound off a trend line of support. While this bounce is encouraging the Russell 2000 still has resistance at the top of its trading range near 830 and a trend line of lower highs evident on the weekly chart below.

If the $RUT can breakout past 830 then it would be a sign that this rally has a lot further to go. If the bounce in the small cap index fails then I would expect a much deeper correction. We could see the $RUT drop toward the 770-760 area or lower.

Daily chart of the Russell 2000 index

Weekly chart of the Russell 2000 index

We're still watching the Dow Jones Transportation Average. Rising oil and gasoline prices have been a burden for this sector. Plus, a drop in coal demand has been impacting the railroads. You can see how the $TRAN index has traded one channel for another. If the transports can breakout past the top of this new bearish channel it would be bullish for market sentiment. This could depend on the price of oil, which will be influenced by trading in the U.S. dollar. Now that the Greece problem is temporarily solved the euro could bounce, pushing the dollar lower. Normally a lower dollar means higher commodities, which would be bearish for the transports. Keep in mind that these currency-commodity relationships don't hold up 100% of the time. We'll have to see how the week progresses.

chart of the Transportation Average

Another sector to watch is the financials. If the financial sector can keep their rally alive then it will fuel bullish sentiment for the rest of the market. Currently the XLF financial ETF has bounced back toward resistance. A breakout here would be bullish and could spark another leg higher.

Daily chart of the Financial ETF (XLF)

Looking ahead the Producer Price Index (PPI) and Consumer Price Index (CPI) will provide a look at inflation in the U.S. economy. The Empire State survey and Philly Fed survey will showcase business growth in two key regions. Yet the biggest event for the week might be the FOMC meeting on Tuesday. No one is expecting any changes from the Fed so the focus will be on the Federal Reserve's statement. The market will want to see if the FOMC hints at any future QE3 or other forms of policy to stimulate the economy. We suspect that Bernanke and gang will not announce any changes or offer any hints until the two-day April meeting so he can follow up the Fed statement with his quarterly press conference. With the U.S. economy starting to slowly get better, month by month, will the Federal Reserve stick to their previously stated low (almost zero percent) interest rate policy into 2014?

- Tuesday, March 13 -
Retail sales for February
Business inventories for January
FOMC interest rate decision

- Wednesday, March 14 -
Import/Export prices for February

- Thursday, March 15 -
Weekly Initial Jobless Claims
New York Empire State Manufacturing Index for March
PPI for February
Philly Fed data

- Friday, March 16 -
CPI for February
Industrial production and Capacity Utilization
Michigan Sentiment for March

Additional key dates coming up:

Mar. 19th, Greek debt auction for CDS-backed bonds
Mar. 20th, Greek deadline for $19 billion debt payment

The Week Ahead:

What should investors be looking at now that the Greek private sector bond swap is done? On a short-term basis we have five days left until March options expiration. We have seven trading days left until the March 20th deadline for Greece's bond payment. Of course now that they have the bond swap done Greece qualifies for the big 130 billion euro bailout so March 20th should be a non-event (we hope). Elsewhere in Europe the focus could switch to Spain and Portugal. Spain is already challenging the EU's resolve by declaring they won't hit their previous 2012 budget deficit targets (i.e. deficits will be higher than planned). While the Greek problem could be temporarily off the market's radar the toxic debt issue for Europe remains.

Looking at the U.S. the number of Americans on food stamps has risen to one in seven. The official unemployment rate is 8.3% but if you include the underemployed and those that have used up all their unemployment benefits it's closer to 15%. Rising gasoline prices are going to have a much bigger impact on this section of the population. Gas prices remain a point of concern for market pundits but thus far the surge in gas at the pump has not hurt stocks and we're definitely not seeing any impact in the retail stocks with the RLX retail index at new highs. A recent poll showed that gas would have to hit $5.30 a gallon before Americans would start adjusting their lifestyle. You can bet that if gas gets anywhere near $5.00 a gallon it's going to become a major issue for the upcoming election.

The good news tonight is that U.S. economic data is still slowly improving, which has helped the market maintain its bullish trend. Of course we don't live in a vacuum and we'll have to keep a wary eye on slowing growth in Europe and China. The market will also stay focused on oil. The situation in Iran has not changed. There is still speculation of a potential military strike on Iran's nuclear facilities sometime this year. Iran naturally wants to foster any geopolitical worries since high oil prices helped their economy.

Here at home investors could turn their attention toward the U.S. residential market as we get closer to spring. The situation seems to be improving with builder confidence on the rise and inventories falling. We are also about six weeks away from the next round of earnings season. Once we get past earnings in April then investors will worry about the seasonal trends like the "sell in May" crowd. Plus, we will face a very nasty Presidential race here in the U.S., which could sour consumer sentiment.

Overall the market trend is still up but if the major indices don't breakout past their recent highs it will look like a bearish top and could set up for a deeper correction lower. Big picture we are still in a bull market but stocks remain overbought and a -5% to -10% pull back in stock would probably be healthy. At the same time a breakout past current highs could spark more short covering and money managers will be chasing performance again.

Don't forget to set your clocks ahead this weekend as we "spring forward" with daylight savings time.

- James