A week of better than expected economic data and improvement in the unemployment rate helped fuel a market rebound after a two-week decline. Stocks bounced but the tech-heavy NASDAQ lagged behind the other major indices thanks to a pullback in shares of Apple (AAPL). Apprehension about Spain's financial stability remains but these worries failed to spark any serious selling pressure. We are just a few days away from the Q3 earnings season and just over four weeks away from the U.S. presidential election.

Overall the flow of economic data turned positive last week. The ISM data for September came in at 51.5 versus estimates for 49.7. Numbers over 50.0 indicate growth. The ISM Services number hit 55.1 compare to estimates for a reading at 53.0. The factory orders for August fell to its worst levels since January 2009 at -5.2% but that was actually better than economists were expecting. The FOMC minutes were a non-event with the Federal Reserve claiming that economic activity continues to grow at a moderate pace.

The big economic event for the week was the jobs data. The ADP Employment Change report came out on Wednesday and showed a +162,000 increase in private jobs versus estimates of +130,000. The nonfarm payrolls jobs report said the U.S. added +114,000 jobs in September, which was close enough to be in-line with estimates. The government also adjusted August job growth from +96K to +142K and revised July's jobs number from +141K to +181K. The trend certainly seems to be improving. Yet the real surprise was the unemployment rate.

The unemployment rate is determined from the household survey each month. The fact that the U.S. unemployment rate has been at or above 8% for almost four years has been a political stumbling block for the current administration. Suddenly seeing a drop from 8.1% to 7.8% in one month immediately sparked cries of manipulation for political gain this close to November's election. The unemployment rate almost never moves more than 0.1% during any given month so it's understandable there would be concerns to suddenly see a -0.3% improvement.

Whether you believe the numbers or not the improvement in the unemployment rate is certainly bitter sweet. The only reason the unemployment rate dropped is because more than 450,000 people stopped looking for work. They didn't suddenly find a job. They just gave up so the government stopped counting them as part of the workforce. The number of people currently in the U.S. labor force participation rate has fallen to 30-year lows at 63.6%. One improvement found within the report on Friday was an increase in the average hourly earnings and the average workweek. Earnings ticked up +0.3% and the average workweek rose from 34.4 to 34.5. A rising workweek usually leads to more hiring but we need to see a positive trend in the average number of hours worked.

Statisticians did note that this was the third September in a row that we saw a large increase in part-time job growth. It could be teenagers and college kids back from summer and needing some money during the school year. It could be adults trying to pick up extra work to pay for the upcoming holiday shopping season. There is also a growing number of citizens who are accepting part time jobs because they cannot find full time work. Here's a head scratcher for you, a recent survey of businesses showed a large number of them were postponing any plans to hire more people until after there was some sort of resolution or postponement of the 2013 fiscal cliff, scheduled for January, or some sort of resolution to the Eurozone financial crisis with Greece and Spain. If most businesses are postponing hiring, where is the job growth coming from?

Major Indices:

Traders bought the dip. After a relatively minor two-week correction lower the major indices rallied. The S&P 500 index almost made it five gains in a row but stocks pared their gains on Friday and the S&P 500 closed in the red by less than two points. You'll notice on the chart that the S&P 500 seems to have found some resistance at the middle of the bullish channel and near its mid September highs. This could be setting up for a dip toward the bottom of the channel.

On a short-term basis I would look for support near 1440. If the 1440 level fails then look for additional support near 1420 and its rising 50-dma. If the rally is able to continue then the next levels of overhead resistance should be 1480 and the 1500 mark.

chart of the S&P 500 index:

The NASDAQ did produce a gain for the week but the composite index was struggling. Friday's move actually produced a bearish engulfing candlestick one-day reversal pattern. That certainly doesn't bode well for Monday. The late September low was 3080. We can look for possible short-term support in the 3100-3080 area. If that level breaks then it's probably a quick drop toward the 3040 level. If somehow the rally continues then the NASDAQ will encounter resistance at its September highs near 3200.

chart of the NASDAQ Composite index:

The small cap Russell 2000 index delivered a bounce for the week to end a two-week pullback. Unfortunately the sell-off from its intraday highs on Friday is not very encouraging. Currently there is a bullish trend of higher lows but if the $RUT breaks down under its 30-dma, then I suspect we'll see it fall toward support near 820.

If somehow the rally continues then look for the $RUT to challenge resistance at its September highs. That just happens to be a test of its all-time high set back in 2011 (near 870). A breakout past 870 on the $RUT would be very bullish for the market since it would signal confidence by fund managers to own small caps.

Daily chart of the Russell 2000 index

It's a relatively slow week for U.S. economic data. The PPI is probably the biggest report for the week. Investor attention will likely focus overseas, especially Europe. The Troika will release an update on Greece, which could worry the markets. Germany's Chancellor Merkel will also visit Greece this week, which will definitely generate headlines. You'll likely hear about the ESM bailout fund becoming operational this week. Another potential headline will be the USDA crop report thanks to the recent drought.

It's also worth noting that the Q3 earnings season will officially start on Tuesday with Alcoa's (AA) earnings report. Earnings season doesn't hit full swing until October 15th. Right now analysts are expecting the S&P 500's component companies to deliver a drop in earnings by -1.9%. Energy and oil companies could be some of the worst performers with an estimated -24% drop in earnings in the third quarter.

Economic and Event Calendar

- Monday, October 8 -
Troika's report on Greece
EU Finance ministers begin a two-day meeting

- Tuesday, October 9 -
Q3 Earnings Season begins
ECB President Draghi to speak

- Wednesday, October 10 -
Wholesale Inventory data for August
Federal Reserve Beige Book report

- Thursday, October 11 -
Weekly Initial Jobless Claims
Import/Export prices
Eurozone inflation data
Chinese government's new loan data
G7 Finance Minister meeting
Vice Presidential Debate

- Friday, October 12 -
PPI for September
Michigan Sentiment for October

Additional Events to be aware of:

Oct. 14th - Chinese inflation data
Oct. 16th - 2nd presidential debate
Oct. 21st - Spain's regional elections
Oct. 22nd - 3rd presidential debate
Oct. 23rd - FOMC meeting begins two-day meeting

The Week Ahead:

The next couple of weeks could be interesting. Prior to last week most of the economic data has continued to disappoint and that doesn't bode well for earnings season or corporate guidance. Yet Wall Street is already expecting a disappointing earnings season so there is always a chance that corporate results come in bad but better than expected, which could produce an upside surprise.

Politically we could hear a lot more about the upcoming fiscal cliff. Both Goldman Sachs and Morgan Stanley have adjusted their targets for the S&P 500 due to the impact of the fiscal cliff, due to hit the U.S. in January 2013, that's less than three months away. Goldman warned that the S&P 500 could drop 200 points over the next several months as investors growing increasingly worried that the fiscal cliff will push the U.S. back into recession. Morgan Stanley warned the move could be even worse thanks to the combination of the fiscal cliff in the U.S., a slowdown in China, and the ongoing struggles in Europe.

Investors remain cautious about the market. Even though the major indices are near their 2012 highs and multi-year highs, money continues to flow out of stocks. The Investment Company Institute said another $5.1 billion was withdrawn from stock funds the week ending September 26th. That follows a -$4.8 billion withdrawn the week before. Money continues to flow into the perceived safety of bonds with the yield on the ten-year bond closing the week at 1.8% and the yield on the 30-year bond at 3.0%.

Greece and Spain will definitely generate headlines this coming week with Troika's last report, an EU finance minister meeting, and Spain's upcoming regional elections. Greece claims they need more help while Spain says they don't need a bailout.

The markets do not seem to be pricing in any geopolitical risk. The situation in Iran is growing worse with inflation in the country starting to spiral out of control. As Iran's economy crumbles due to current sanctions the government could grow desperate and do something stupid like try and close the Straits of Hormuz. Meanwhile the civil war in Syria continues and now Syria is trading rocket fire with Turkey. You have to wonder why the current Syrian government would risk a conflict with Turkey when they can't control their own population.

Technically the U.S. stock market's trend is still higher but seeing the indices stop or reverse under their 2012 highs doesn't inspire a lot of confidence to buy stocks at current levels. We could be facing several days or weeks of consolidation or pullbacks while stocks generate enough momentum to breakout higher. I suspect it will be corporate earnings guidance and results that propel stocks one way or the other over the next three weeks.

James