The S&P 500 index just closed its fifth week of consecutive gains. It was also the most boring week of gains. Volume was very low all week with many market participants away on vacation before back-to-school starts up again in the U.S. soon. Economic data continues to disappoint but the prevailing wisdom would suggest equities are rising on hopes of further stimulus from major central banks. A bounce in the U.S. dollar failed to stop another rise in commodities. For the week the S&P 500 added another +1.0%, the NASDAQ +1.7%, the Dow Industrials +0.8%, the small cap Russell 2000 +1.6%. One of the market's best performers was the SOX semiconductor index with a +4.0% gain on the week.

Looking back the markets got a boost on Monday as expectations rose that China would offer new stimulus to halt the slowdown in their economy. Then on Tuesday there were new headlines out of Europe that Germany's Chancellor Merkel had caved into peer pressure and would support the ECB's proposed bond-buying program. After those two headlines stocks were left without any further catalysts and equities churned sideways.

Economic data in the U.S. was mixed. The initial jobless claims came in at 361,000, which was a little less than expected. Another positive was the Q2 productivity reading came in at 1.6%, also better than estimated. The wholesale inventory numbers for June showed a decline but sales outpaced the drop in inventories, which leaves the inventory to sales ratio at its worst levels in over two and a half years.

Across the pond in Europe we saw Germany's industrial production for June come in worse than expected. Italy's Q2 GDP was negative for the fourth quarter in a row. Yet the market was focused on China this past week. China's industrial production for July fell to its slowest pace in three years at +9.2%. Another blow was the plunging July export number, which came in at +1% versus estimates for +8%. In June this number was +11.3%. This is a very clear signal that the world's demand for goods is slowing and reaffirming worries about a global slowdown.

After the export numbers came out we started seeing economists cutting their GDP estimates for China. Normally you might have expected the stock market to drop on this data but expectations are rising that China will announce new stimulus to counteract the slowdown. If they don't deliver something soon though investors may lose their patience.

Major Indices:

I mentioned earlier that the S&P 500 is now up five weeks in a row. While that is positive you could also argue that stocks might be a little bit overbought and due for a pullback. On a more short-term basis this past week was more sideways than up. Depending on your bullish or bearish bias the market has either run out of gas and is poised to pullback or it's merely catching its breath before continuing the advance.

The fact that the S&P 500 spent most of the week above round-number resistance at the 1400 level is positive. Yet at the same time the index seems to be at the top of a multi-week trend line of resistance. The range this past week looked like the 1395-1407 area. A breakdown below 1395 would probably signal a drop toward support near 1380. If that level fails then a drop to the 1360 area. If the S&P 500 breaks higher than we're looking at resistance at its 2012 highs near 1420. The high for the year (on April 2nd) is 1422.

Daily chart of the S&P 500 index:

While the S&P 500 was churning above the 1400 level the NASDAQ composite managed to consolidate sideways above the 3,000 level. Technically this is bullish you could argue the path of least resistance is up. If something happens and stocks turn lower and the NASDAQ breaks down under 3,000 then the next support levels are 2975 and 2950. If this rally continues then the levels to watch are 3050, 3075, and 3100. The 2012 highs are in the 3130-3135 area.

Daily chart of the NASDAQ Composite index:

The picture for the small cap Russell 2000 index is not quite so clear. It did spent the last few days chopping sideways. It is above the month of July's bearish trend of lower highs (bullish). It has not broken out past its July highs the way the S&P 500 or NASDAQ have (bearish?).

Right now the $RUT is hovering near round-number support/resistance at the 800 mark. The 780 level should still be support and now it's bolstered by the 50-dma and 200-dma. Speaking of those two moving averages the are both starting to slope higher, which is longer-term bullish. Yet the rally here probably has resistance near 810 and stronger resistance near 820.

Daily chart of the Russell 2000 index

The pace of economic data picks up this week. We'll see both the PPI and CPI readings, which should indicate that inflation remains lows. The New York state fed survey and Philadelphia fed survey will give us some regional readings on business and manufacturing activity. One of the big "events" of the week will be Cisco Systems (CSCO) earnings report on Wednesday. CSCO is a major component in NASDAQ-100, the Dow Jones Industrials, and the S&P 500 indices. While one stock may not move an index that much their report and guidance could spark a move either way since they are a large technology company and a bellwether for the tech industries.

A few events to keep aware of. Federal Reserve Chairman Ben Bernanke is schedule to speech at the Fed's annual Jackson Hole, WY event on August 31st. Plus, the U.S. debt ceiling will likely be hit in September.

Economic and Event Calendar

- Monday, August 13 -
(nothing significant)

- Tuesday, August 14 -
U.S. retail sales for July
Producer Price Index (PPI) for July
Business inventory report for June

- Wednesday, August 15 -
Consumer Price Index (CPI) for July
New York Empire State manufacturing report for August
Industrial production and capacity utilization
Cisco Systems (CSCO) reports earnings after the closing bell

- Thursday, August 16 -
Weekly Initial Jobless Claims
Housing starts & Building permits
Philly Fed survey

- Friday, August 17 -
University of Michigan consumer sentiment

The Week Ahead:

Looking at the market I can understand why investors might be scratching their heads as to why stocks keep rising. The stock market has plenty of reasons to fall. It seems like we can boil the market's strength down to one issue that that is expectation for further central bank stimulus.

We are not talking about just the U.S. Federal Reserve either. While many investors still believe the Fed will offer some sort of QE3 program, I believe the situation will have to get pretty bad before the Fed decides to use what many believe is their last bullet to save the economy. The central banks to watch are the European Central Bank (ECB), the Bank of England (BoE), the Bank of Japan (BoJ), and People's Republic Bank of China (PBoC).

ECB President Mario Draghi has promised to do whatever it takes to save the Eurozone but we're really not seeing any solutions yet. Although he did gain a minor win at German Chancellor Merkel's concession to support ECB bond-buying. We'll have to see if that tool actually gets further support and put into play or not. Meanwhile both the BoE and BoJ could launch further stimulus. Yet the real market mover here is China's central bank.

The economic data out of China recently has been terrible. Odds are the main reason the stock market has not sold off yet is growing expectation that China will announce some sort of new stimulus program. If that does not materialize in the next few weeks it could be bad news for global markets. Many people forget that China is going through a once-in-a-decade leadership change but we don't hear about it because the communist party there likes to do thing behind closed doors.

Let's recap some of our concerns for the market. You already know that August and September are seasonally bearish times of year for equities. Technically the transportation sector is not confirming the market's recent rise. Plus the volatility index (VIX) is very low and under the 15.0 level. Normally when the VIX is too low it's a sign of too much trader complacency and would suggest a market top is near. Unfortunately, using the VIX as a timing tool can be tough since "near" could be tomorrow or it could be several weeks.

Fundamentally we continue to see economic data signaling a potential recession. China's economic data is plunging. India, with a population almost the size of China, is also seeing its economy slow down. The U.S. economic data, while not great, is not falling as fast as it was. Although retail sales in the U.S. have declined three months in a row. Gasoline prices are on the rise again and that negatively impacts retail spending. You already know that consumer spending counts for nearly 70% of the U.S. economy. The U.S. is still facing the widely discussed "fiscal cliff" in January 2013. I'm not sure the government will actually do anything about the cliff until after the elections in early November.

The Q2 earnings season is almost over. We knew this was going to be a tough season and analysts had lowered expectations going into this earnings season. Yet so far only half of the S&P 500 companies have beaten Wall Street's estimates. That's the lowest in three years.

What do we do? The market is climbing in face of a parade of bad news. Is this just a case of no volume? Are there so many investors (big and small) not participating that stocks are drifting higher? They say volume is a weapon of the bulls. So rising markets on low volume is not a sign of confidence. Of course the challenge is trading the market in front of us and not trying to trade what the market "should" be doing according to our own analysis and bias.

I will continue to urge caution here. If we see an opportunity to initiate positions I would start small. Limit your position size and if the market continues to move in your favor then you have the freedom to add to your position. Or you can choose to sit back and wait. There will always be another market pullback. A quick look at any weekly chart on any major index will show you that there is almost always another opportunity to buy a dip down the road. Don't feel rushed to make trades. Wait for the right entry point. If Ben Bernanke doesn't tell the market what it wants to hear at his Jackson Hole speech it could spark a sell-off going into the month of September.

James