The U.S. stock market surged on short covering to new multi-year highs thanks to headlines regarding the European Central Bank's plans to buy bonds from the weaker Eurozone members. It was a week filled with several major headlines but the ECB news had the biggest effect on the equity markets. Another disappointing jobs report on Friday may have slowed the market's bullish momentum but news that China is launching a new one-trillion yen construction boom was seen a as positive for the market.

Normally investors would have expected market declines in a week where you have major corporate bellwethers like FedEx (FDX) and Intel (INTC) issuing earnings warnings and a worse than expected jobs report. The nonfarm payroll and unemployment reported show the labor participation rate falling to its worst levels in thirty years yet the stock market doesn't care. That's because the global markets are addicted to stimulus and the central banks are offering another round of drugs. The ECB's new plan is a form of "stimulus" as is China's new plan to launch a massive construction boom across the nation. The Fed Chairman Bernanke has already said the Federal Reserve will provide more quantitative easing. It was only a matter of when and how much? Now after the faltering jobs report on Friday many are expecting Bernanke to announce a new QE plan at the next FOMC meeting this week.

There were was a small flood of economic data this past week. In the U.S. the August ISM index came in at 49.6. Numbers under 50.0 indicate contraction and suggests a potential recession building. The July construction number fell -0.9% versus expectations for a +0.5% gain. Coming in better than expected was the latest reading on vehicle sales, which rose to a three-year high at an annual pace of 14.46 million units. The ADP Employment Report showed +210,000 new jobs in the private sector and up from the prior month's +173K jobs. The ISM services index for August was better than expected at 53.7. The weekly initial jobless claims dipped to 365,000, which was slightly under expectations. In the not-so-great column was America's achievement of seeing its debt rise past $16 trillion for the first time in history. The debt is growing at $3.5 billion a day and has now grown to more than 100% of the U.S. GDP.

Overseas we saw Germany's exports rise higher than expected yet the country's PMI reading was below estimates. The Purchasing Managers Index is a thermometer on a country's manufacturing sector. France saw its Q2 unemployment hit 10.2%, which is the highest level in more than twelve years. Meanwhile both France and Italy saw their PMI readings come in below expectations. The United Kingdom and Spain actually saw improvement in their PMI readings. In central bank news the ECB left interest rates unchanged at 0.75% but announced the new bond-buying program, more on that in a bit. The Bank of England left rates unchanged at 0.5% and left their QE asset-buying program unchanged. Bigger picture the Eurozone PMI services reading came in below estimates at 47.2. Moody's lowered their Eurozone outlook to "negative". The ECB cuts its Eurozone growth forecasts to -0.4% for 2012 and down to a range of -0.4%-1.4% for 2013.

Across the Pacific in China the news was mixed. The China HSBC services PMI fell to 52.00 compared to estimates of 53.1. Remember, readings under 50.0 are negative. The Chinese government is expected to release several economic reports this weekend. That makes the timing of their new nationwide construction plan suspect. Are they trying to soften the blow of disappointing economic data by pre-announcing a one-trillion yen ($157 billion) infrastructure stimulus plan. The economic data in China has been slowing down for months. Last week we mentioned a new problem in China with unsold inventory stacking up and they are running out of storage space. We have been speculating that the Chinese government would announce some form of stimulus by year end to turn their economy around. China is planning 60 new projects from new highways to new airport runways and similarly large construction projects. Will this construction boom be enough?

Aside from the ECB's new bond-purchase program the jobs report on Friday was one of the biggest headlines. Economists were expecting +125,000 new jobs in August. The U.S. needs about +150,000 new jobs a month just to keep up with population growth and new graduates. Yet Friday's report only showed +96,000 new jobs. The prior month's +163,000 was revised down to +141,000. June's was revised down from +64K to +45K. It was not a good report. The three-month average is a very weak +95,000 jobs. What's really disappointing is that the labor participation rate has fallen to its worst levels since the year 1981 at just 63.5 percent. The unemployment rate ticked down from 8.3% to 8.1% merely because so many people stopped looking for work. Unemployment has been above 8% for more than three years, which is the longest stretch since the Great Depression. According to one analyst if the labor participation rate was normal the unemployment rate would be over 11%.

I feel obligated to discuss the ECB's new bond-purchasing program. Officially called "Outright Monetary Transactions" (OMT) the program will buy short-term bonds maturing within the next three years. This program is targeting weak Eurozone nations like Spain and Italy. You may recall that over the past two years as the EU struggled with the Greece debt problem they kept looking over their shoulders at Spain and Italy, which are many times larger than Greece and would be a nightmare to deal with if they were insolvent. How many times have we heard that Spain and Italy are too big to bail out and yet that's what the ECB is trying to do without officially calling it a bailout.

This new OMT program is fraught with problems. If the ECB, through the new EFSF or ESM bailout funds, is going to buy sovereign debt from a Eurozone nation, the nation they are buying them from has to ask for help. If a nation asks for help they have to agree to a list of fiscal and economic austerity measures. Not only does applying these austerity measures going to shrink government spending and thus shrink their economies but it's also going to force these nations to give up some of their sovereignty (autonomous control over their finances). That's something neither the individual governments or their populations really want.

Furthermore the ECB has said this program can be "open ended", which means there is no limit to how debt they can buy. Yet at the same time they are planning to "sterilize" this debt. How they can do both remains to be seen. The ECB wants this to be unlimited so bond investors don't try and game the system, which would only provide a temporary relief to countries involved. If the ECB threatens an open-ended program then bond yields on the troubled countries that participate should remain low(er) and prevent a debt crisis. On top of all of that the rest of the Eurozone has to agree to the new program and will likely to have approve the list of austerity measures the requesting country has to endure. If a country asks for help and then does not follow through on their austerity targets (e.g. like Greece has) the ECB can immediately stop buying bonds, which of course would send bond yields skyrocketing for the offending country and likely spark a meltdown.

Major Indices:

The S&P 500 has rallied to new four-year highs following Thursday's short covering. The breakout past resistance in the 1420-1425 area is technically very bullish although we can argue the index is short-term overbought and could easily see a pullback. Now broken resistance in the 1420 area should be new support. I suspect the 1440-1450 area could be new resistance but momentum favors the bulls right now. We could see the S&P 500 testing round-number resistance at 1500 by yearend.

FYI: The S&P 500 is up +2.2% for the week and +14.3% for the year.

chart of the S&P 500 index:

The market's widespread rally has produced a big move in the NASDAQ composite, which tagged levels not seen since the year 2000. Technically the NASDAQ is above its March 2012 highs but it's not convincingly past this level. Bears could argue the NASDAQ is merely testing this level of resistance at the March highs near 3135. However, momentum favors the bulls. Can the NASDAQ see a pullback? Of course it can but broken resistance near 3100 is probably new support.

Looking back at the fourth quarter of the year 2000 the NASDAQ was pretty volatile. It's not easy to determine any specific support or resistance. I suspect the 3200 is probably the NASDAQ's next resistance level. FYI: The NASDAQ composite is up +20.3% for the year.

I know a lot of traders like to follow the QQQ, which is the ETF for the NASDAQ-100 index. The Qs are nearing potential round-number resistance at the $70.00 mark. A breakout here could lead to the next level of resistance at $72.00 and near $74.00. Broken resistance near $68.50 should be new short-term support.

chart of the NASDAQ Composite index:

chart of the QQQ (NASDAQ-100 ETF):

The small cap Russell 2000 index outperformed its big cap rivals with a +3.7% gain for the week. The $RUT is currently up +13.6% for the year. Yet while the S&P 500 and the NASDAQ are breaking out to new multi-year highs the $RUT still has work to do just to reach its highs.

The recent breakout past resistance near 820 is bullish and now the $RUT is testing its 2012 highs near 850. If the small caps pullback I would look for support near 825-820. On the other hand if the rally continues and the $RUT pushes past 850 then the next level of resistance is the index's all-time high set in 2011 near the 868 level.

You'll notice on the chart below that the $RUT has broken the bearish trend of lower highs.

Daily chart of the Russell 2000 index

Last week was a busy one for economic data. This week there is a two-day lull and then it starts up again. The big events for the market is the German court's decision on the ESM due out September 12th. Then the end of a two-day FOMC meeting on the 13th where Bernanke could announce a new QE3 program. Elsewhere we could see shares of AAPL moving on its new product announcement September 12th. Typically shares of AAPL see a "sell-the-news" type of move after their event. This week could also bring an update from Moody's credit rating agency on the country of Spain.

Economic and Event Calendar

- Monday, September 10 -
Italy's GDP estimate

- Tuesday, September 11 -
(nothing significant)

- Wednesday, September 12 -
German courts vote on constitutionality of ESM
FOMC meeting begins
Apple expected to unveil the iPhone 5
Dutch general elections
Import/Export prices
Wholesale inventories

- Thursday, September 13 -
Weekly Initial Jobless Claims
FOMC meeting ends (possible QE3 announcement)
Fed Chairman Bernanke holds post-meeting press conference
Producer Price Index (PPI) for August
G-20 meeting

- Friday, September 14 -
U.S. Retail sales for August
Consumer Price Index (CPI) for August
University of Michigan (consumer) sentiment
Eurozone CPI data

Additional Events to be aware of:

Sep. 15th - Eurogroup meeting
Sep. 16th - EU Finance minister meeting

Also in September, the IMF will release their review of Greece. Plus, the U.S. will likely hits its debt ceiling again (this time over $16 trillion).

The Week Ahead:

Looking ahead the path of least resistance for stocks seems to be up. Equities have been rising on expectations for new stimulus from the world's major central banks for several weeks now. So far market participants are getting exactly what they wanted. Bernanke has suggested the Fed "will provide" new stimulus. While we don't know when and how the Fed might do that there is growing speculation he may announce something this Wednesday, especially after the disappointing jobs report on Friday. ECB President Draghi is giving the markets what they want with this new bond-buying program. Of course the market is completely ignoring all the details that could make this program a dud. Plus, China's new construction program is bullish for the market and investor sentiment since it shows the government trying to help their slowing economy.

The week ahead could see some pitfalls. China is due to release several economic reports this weekend and there is speculation that the results will be much worse than expected, which is why they announced the big infrastructure plans on Friday to soften the blow. The German courts could rule against the constitutionality of the ESM bailout program. It is unlikely but it is definitely a possibility and a no vote for the ESM could spark a lot of volatility in the global equity markets. Bernanke could fail to deliver on growing expectations for some form of QE3 this week. There has been some analysts speculation that if he does not announce something this week then he will announce it in December. New money printing from the major central banks should be bullish for commodities. That's why we're seeing gold shoot higher this past week.

In the U.S. investors have lost focus on the coming fiscal cliff on January 1st. Instead the focus is on whether or not the Fed will announce some new form of stimulus whether we need it or not. Pretty soon the focus will turn to the upcoming presidential election just two months away. Other issues currently being ignored by the market are rising tensions with Israel and Iran, the civil war in Syria, the worst drought in the U.S. in 50 years, and Greece could still get kicked out of the Eurozone although for many that's already an assumption. Plus, we could see the U.S. debt ceiling issue hit Washington again.

In spite of all the potential land mines in the market we almost half to be bullish with the S&P 500 and the NASDAQ hitting new multi-year highs. There has been no indication that this is some sort of last-gasp top in the market. However, I would remain cautious. We can launch new positions if we see an entry point but I would keep our position size small to start.

James