Stocks delivered a very lackluster performance for the week. I cautioned readers last weekend that there would be no progress made in Washington on the fiscal cliff issue and that stocks would churn sideways while we wait. Economic data was mostly better than expected with a few exceptions. Yet we're seeing more analysts downgrading their U.S. Q4 GDP estimates. This trend could start to weigh on investor sentiment. As you know the Eurozone is currently in recession and this past week the ECB said the recession would likely continue into 2013. The European Central Bank now expects the Eurozone economy to fall -0.3% in 2013 with a potential range of -0.9% to +0.3%. That's down from September's estimate of -0.4% to +1.4%.

The big economic report this past week was the nonfarm payrolls (jobs) report. Economists were only expecting +85,000 jobs due to Hurricane Sandy yet the November report showed +146,000. This better than expected beat was tainted by news that October was revised down -33,000 and September down -16,000. At first glance the news that the U.S. unemployment rate fell to 7.7%, the lowest since December 2008, is good news. Unfortunately, the only reason the unemployment rate fell was because fewer people were looking for work. The BLS report said 350,000 people stopped looking for work so they are no longer in the official workforce and no longer counted. The Household employment survey said the labor force lost -542,000.

Overseas we saw Germany's factory orders for October rise +3.9%, which was well above estimates of just +1%. China's manufacturing PMI data came in at 50.6, this was below estimates but still above the 50.0 level. Readings under 50.0 indicate contraction. China's services PMI index dropped to 52.1. Back home in the U.S. we saw November vehicle sales surge to an annual pace of 15.5 million. That is the highest level since February 2008 thanks to consumers buying new cars to replace those destroyed or damaged by Hurricane Sandy. The U.S. ISM services index gained +0.5 points to settled at 54.7. Yet the manufacturing ISM dropped to 49.5.

One of the biggest surprises was the University of Michigan's consumer confidence number, which plunged from 82.7 to 74.5. Economists were only expecting a mild dip to 82.4. This was the sharpest drop in sentiment in months and does not bode well for the holiday shopping season. Traditionally analysts try to tie higher consumer confidence numbers with higher consumer spending so falling confidence readings are worrisome.

Major Indices:

It shouldn't be a surprise to see the S&P 500 index churning sideways. For the week the index gained +0.1%. The S&P 500 bounced when it touched round-number support at 1400 midweek. Yet it remains under short-term resistance at 1420 and its simple 50-dma. A breakout past 1420 could signal a run towards the next level of resistance in the 1440-1450 area. Beyond that are the 2012 highs in the 1470 area.

chart of the S&P 500 index:

The NASDAQ composite underperformed the other indices with a -1.0% decline for the week. Most of the blame for the NASDAQ's relative weakness was Apple's (AAPL) $50 plunge. AAPL could be headed back toward the $500 level again and that will put pressure on the NASDAQ and NASDAQ-100 indices.

I am also concerned that the pullback in the NASDAQ looks like a bearish reversal at resistance. Now the index is back under the 3,000 level and its 200-dma. If this dip continues the next support level should be 2950. If that level fails then it's the 2900 area.

chart of the NASDAQ Composite index:

The lack of movement was most evident in the small cap Russell 2000 index. The $RUT spent almost the entire week inside a 10-point range. A convincing close above 825 or 830 on the $RUT could inspire the bulls again and fuel some short covering by the bears. Should the $RUT breakout higher the next level of resistance is probably the 840-850 range. If the $RUT reverses lower then look for support in the 805-800 area.

Daily chart of the Russell 2000 index

This week will have a number of economic reports but none of them are likely to be market movers. The one event that could move the market is the FOMC meeting and Federal Reserve Chairman Ben Bernanke's press conference. The two-day meeting ends on Wednesday. No change in the interest rate is expected. However, the Fed's Operation Twist is due to conclude at the end of this year. Many are speculating that the Fed might announce some new quantitative easing program (QE4?) to replace Twist. How much and what form any new QE program will take will be the headline. Another potential headline to watch will be Greece's upcoming debt payment. The deadline is Dec. 14th.

Economic and Event Calendar

- Monday, December 10 -
Eurozone industrial production

- Tuesday, December 11 -
wholesale inventory data
FOMC meeting starts

- Wednesday, December 12 -
import/export prices
Eurozone inflation data
FOMC meeting ends (rate decision)
Fed Chairman Bernanke's press conference
Eurozone finance minister meeting

- Thursday, December 13 -
Weekly Initial Jobless Claims
retail sales for November
Producer Price Index (PPI)
business inventory data

- Friday, December 14 -
Consumer Price Index (CPI)
industrial production
Eurozone unemployment

Additional Events to be aware of:

Dec 24th - U.S. markets close early for Christmas eve.
Dec. 25th - U.S. markets are closed for Christmas

The Week Ahead:

The fiscal cliff negotiations in Washington will remain front page news for Wall Street. Last week we talked about how congress is supposed to begin its Christmas holiday on Dec. 14th. Odds are good that the holiday will get delayed while cliff talks continue. We have two weeks until Christmas. I would expect another week of posturing and debate without any results. Then in the final week before Christmas we might actually see some sort of deal come together. Of course by that time many market participants will have already called it quits for the year and volume will start to dry up. This does not mean that stocks won't move. They could move big either way if we see a fiscal cliff deal or lack of one. Unfortunately, once the politicians cobble together a deal on the cliff they could go right back to fighting over the U.S. debt ceiling.

There is a chance that this Monday could be bullish for stocks. There was positive news out of China and Greece this weekend. China said their industrial production and retail sales came in better than expected. November's industrial production surged +10.1% compared to a year ago. The country's retail sales grew +14.9%. These numbers could do a lot to help soothe fears that China was slowing down. Meanwhile Greece is said to be nearing a debt buyback deal. Once this deal is done it will allow the EU and IMF to proceed with the next tranche of bailout money for Greece. This probably needs to happen before Greece's Dec. 14th debt payment is due.

Put it altogether and I am mildly optimistic. If the S&P 500 index can deliver a convincing close above 1420, better yet 1425, it could ignite the next leg higher for stocks. This would be just in time for a Santa Claus rally on Wall Street and likely some end of year/end of quarter window dressing.

James