After a multi-week decline in the U.S. stock market an oversold bounce showed up just in time for Thanksgiving week. The S&P 500 index is up five trading days in a row and delivered its best weekly performance since June. A handful of economic reports came in better than expected while investors ignored any that disappointed. A cease-fire between Israel and Hamas could have buoyed trader sentiment but riots in Egypt are now making headlines. Geopolitical risks remain. Meanwhile Federal Reserve Chairman Ben Bernanke warned that if the fiscal cliff issues are not solved the U.S. will fall back into recession.

There were a number of headlines out of Europe this past week. France lost its "AAA" credit rating from Moody's. This news wasn't too shocking since S&P had already downgraded France months ago. What is troubling was news that EU leaders canceled their budget talks in less than two days. They could not come to agreement as they discussed their next seven-year (2014-2020) EU budget and promised to try again in early 2013.

A week ago one of the major headlines was news that the Eurozone was officially back in recession. This past week showed that the Eurozone PMI services index fell to 45.7, that's the lowest level since July 2009. Readings under 50.0 indicate contraction and the PMI services number has been under 50.0 for ten months in a row. Deutsche Bank issued a bearish forecast for the Eurozone as well. They warned that both France and Germany, the two largest Eurozone members, might see negative GDP numbers for the fourth quarter as the region continues to slow down. Oddly enough, in spite of these negative economic headlines, the German IFO business confidence survey, of 7,000 executives, unexpectedly improved from 100 to 101.4. Economists had been expecting this confidence survey to drop to 99.5.

Europe will remain in the spotlight. Storm clouds continue to brew for Spain. The Catalonia region of Spain, with 7.5 million citizens and 19% of the country's GDP, has seen a surge of support for those wishing to leave the struggling country and form their own nation. It is very unlikely that this proposal to leave Spain will get enough support in the regional elections but it's throws doubt on Spain's internal political stability. Many are expecting Spain to ask for a full fledged bailout soon and Catalonia will probably balk at the proposed austerity cuts required for further aid from the EU and IMF.

Greece will be back in the news again soon. The small European country has been living on life support, i.e. bailout funds, since May 2010. It's a bit confusing but the next tranche of bailout money to Greece has already been approved but has not been transferred to Greece yet. Eurozone officials are waiting to see the results of an early December referendum where Greek citizens will be voting on whether or not they want to stay in the eurozone or not. If the Greeks vote no, then Europe is unlikely to forward them the next loan installment. Currently Greece is meeting with eurozone finance ministers as they try to restructure Greek debt again. The best bet is that eurozone officials will propose lower interest rates and longer debt repayment schedules to lessen the load for Greece's struggling economy. However, no deal is done yet and eurozone finance ministers meet again on Monday. The referendum is expected on December 5th.

On the other side of the world there was some good economic news out of China. I told readers last week to watch for China's HSBC PMI manufacturing report as one of the economic highlights of the week. The latest PMI data rose from 49.5 to 50.4. This is the first time it has come in above the key 50.0 mark since October 2011. Readings above 50.0 indicate growth.

Back home in the U.S. the latest housing starts data came in 50,000 better than expected at 894,000. Existing home sales rose to an annual 4.79 million pace, which was also 50K better than expected although the prior month was revised lower by 60K. The weekly initial jobless claims fell from 451K to 410K, which was actually better than expected. The University of Michigan consumer sentiment survey's final reading for November fell from 84.9 to 82.7.

Elsewhere the media was focused on Black Friday and the circus surrounding retailers trying to jump start the holiday shopping season. There were mixed reviews over the weekend. American Express said their early readings suggested consumers were spending less than last year. IBM, who handles the electronic registers for thousands of merchants, said that consumers were actually spending more than a year ago. It will be interesting to see what the general tone is come Monday after a long weekend of shopping in America.

Major Indices:

The U.S. market has surged from oversold levels to overbought in just a week. The S&P 500 added +3.6% and pushed back above technical resistance at the 200-dma, the 1380 level and the 1400 level. The bounce has been so sharp it's probably time for some profit taking.

I would not be surprised to see the S&P 500 dip back into the 1385-1380 zone again. If it breaks down under 1380 then it could foreshadow a retest of the November lows near 1350-1340. Should the rally continue the next level of resistance is probably 1420 and the 50-dma, currently near 1425.

chart of the S&P 500 index:

The NASDAQ composite was one of the worst performers among the major indices so it's not surprising it saw one of the biggest bounces. The index surged to a +3.9% gain and pushed back above resistance near 2950 and its exponential 200-dma. I warned readers last week to expect the bounce to sharp and fast.

The simple 200-dma near 2985 and the 3,000 level remain overhead resistance. After such a big bounce I would expect some profit taking. Do not be surprised to see a dip back toward 2900 or the simple 10-dma.

chart of the NASDAQ Composite index:

The small cap Russell 2000 index ($RUT) also rebounded with a +3.9% gain on the week. The close above resistance at 800 is positive and it's currently testing the simple 200-dma. Yet after such a big move higher I would expect a pullback. Do not be surprised to see a dip back toward 790 and the 10-dma. There is still overhead resistance at 820 and the $RUT still has a trend of lower highs. I would remain cautious until we see a strong close above 820.

Daily chart of the Russell 2000 index

The economic calendar this week is a little quiet. We'll see more housing data and the next consumer confidence number. The Beige Book report is probably a non-event although Bernanke speaks on the 27th and that will probably make headlines. The second estimate on the U.S. Q3 GDP is actually expected to be revised higher. That could help the market.

Economic and Event Calendar

- Monday, November 26 -
(nothing significant)

- Tuesday, November 27 -
Durable Goods Orders
Case-Shiller 20-city home price index
Consumer Confidence

- Wednesday, November 28 -
New Home Sales (for October)
Federal Reserve Beige Book report

- Thursday, November 29 -
Weekly Initial Jobless Claims
Q3 GDP (second estimate)
Pending home sales

- Friday, November 30 -
Personal Income and Spending
Chicago PMI
China's PMI manufacturing data

Additional Events to be aware of:

Dec. 7th - nonfarm payrolls (jobs) report
Dec. 12th - FOMC meeting

The Week Ahead:

Thankfully we had a week without headlines out of Washington regarding the fiscal cliff. I hope you enjoyed it because now it's going to become all about the fiscal cliff all the time (as if it wasn't before Thanksgiving). The key will be whether or not the tone changes on Wall Street.

Previously stocks were sinking on worries that Republicans and Democrats would not be able to find any middle ground and the U.S. would go careening off the fiscal cliff. Now it seems the tone might be changing. Investor sentiment could improve on hopes that some sort of deal might get done before the end of the year. Granted any deal will likely be of the "kick the can down the road" variety but in Wall Street's mind it's still a deal.

The back and forth between leaders in Washington could provide for a bumpy, volatile ride for the stock market. Until a deal actually gets done we could see investors selling the rallies. Something that is not helping inspire investor sentiment was the latest forecast from Morgan Stanley. Last week MS said that the global economy was probably headed for another recession in 2013 as the major governments and central banks fumble the economic ball.

Another challenge for investor sentiment is continued violence in the Mideast. Protestors are rioting in Egypt again as the new Egyptian president grants himself several new powers and immunities. Elsewhere in the world we're going to start hearing more about a technical default for Argentina. Credit default swaps on Argentine debt are soaring. The issue stems from a debt restructuring back in 2001 where some of the bond holders chose not to take the new deal. Now it looks like Argentina is losing the battle in court although there are growing suspicions that Argentina will not cough up the $1.3 billion necessary to solve this issue. That is the barest of explanations. I'm not sure how this is going to have any effect on the U.S. market.

Looking ahead I would expect a short-term pullback. Where we bounce or if we bounce is the question. Some are saying the November low is probably the fourth quarter low and we should start buying dips again. I'm not so convinced. I suggest investors stay in a wait and see mode. We could see stocks chop wildly over the next few weeks as we approach the end of the year and the January 1st fiscal cliff deadline.

James