The S&P 500 index is up +5.3% in 2013 and currently on track for its best January performance in a decade. Last week was full of bullish momentum and the S&P 500 marked its longest winning streak (8 days) since November 2004. Both the small cap Russell 2000 index and the Dow Transports hit new all-time highs. Even the NASDAQ composite managed a gain in spite of the massive declines in shares of Apple Inc. (AAPL). Money is flowing out of safe-haven plays like precious metals and bonds and back into equities.

The economic data last week was mostly positive. The weekly jobless claims data is slowly trending lower. The four-week moving average has fallen to its lowest level in more than four years. That could bode well for the next jobs report coming up this Friday. Housing data has been a hot topic. Existing home sales in December were slightly under expectations at an annual pace of 4.94 million. The new home sales figures came in at 369,000 for December. That proved to be a month over month decline but only because November saw a big revision higher. What could be another positive sign of future sales was the growth in mortgage applications. Last week the MBA mortgage index rose +7%.

Investors ignored the regional Federal Reserve business activity surveys. The Philly Fed, the Chicago Fed, and New York Empire State surveys all came in below expectations. On a more positive note most of the data overseas was positive. The U.K. was an exception. The preliminary GDP data for the United Kingdom is suggesting the country is slowing down and could be headed for its third recession in four years. Yet in Germany, the EU's strongest member, the German Ifo business climate index rose more than expected. The German manufacturing PMI data rose to a multi-month high. The ZEW investor confidence survey surged to a multi-year high. Even consumer confidence in Europe is on the upswing. The good news continued in China where the Chinese manufacturing PMI hit a two-year high.

Here at home we are hearing a lot more about the rotation out of bonds and back into stocks. The bond market has seen a multi-year bull rally but it's showing signs of a top. Bonds have been stair-stepping lower since early December and now they are breaking down from a multi-month consolidation near their highs. Multiple firms that track inflows and outflows are noting that 2013 has seen a significant reversal with billions of dollars flowing back into equity funds. According to Lipper the fund flows into U.S. equity funds over the first two weeks of 2013 was $11.3 billion and the biggest since April 2000. As bonds fall their yields rise. The yield on the 10-year U.S. treasury bond has risen to 1.94%. It has not closed at this level since early May 2012. This could be a long-term bullish tailwind for the market but it's not going to prevent short-term corrections in stock prices. There is always an ebb and flow to prices. What is important is that we could be seeing a major trend change in the bond market. If you're a fund manager why earn less than 2% in bonds when stocks are rising and many provide a dividend yield higher than 2%.

Speaking of rotations, you could say Apple Inc. (AAPL) has seen a significant rotation in recent days with investors rotating out of the stock. The company reported earnings on January 23rd. Investors were disappointed with AAPL's revenue number and management's Q2 guidance. This sent shares of AAPL plunging on January 24th with a $63.50 loss to close at $450 a share. AAPL's one-day loss was about $52 billion. In one day AAPL lost more than the entire market cap of companies like Starbucks, Nike, or Target. In the last four months AAPL has fallen from $700 a share to $440 this last week saw a breakdown below very significant support levels. I would consider AAPL a broken stock at this point. It could take weeks or months for it to find an equilibrium and form support. We will definitely keep an eye on it for a potential entry point down the road.

Major Indices:

The S&P 500 is up +1.1% for the week and up +5.3% year to date. Last week I suggested that the 1500 level could act like a magnet. I am impressed that the index closed above 1500 on Friday but at 1502 I would not call it a "breakout". The index is looking overbought with a four-week rally from its late December lows. I still think odds are good it will see some profit taking. The pullback could happen this week or it could happen in early February. It's important to remember that pullbacks are normal. A dip back to 1480 or even 1450 would not derail the longer-term up trend. If somehow the rally does continue the levels to watch are the 1550-1570 region. This is the index's all-time high set back in 2007.

chart of the S&P 500 index:

The NASDAQ composite managed to eke out a +0.4% gain in spite of the large declines of its biggest component, Apple Inc. (AAPL). The trend is up with the NASDAQ up four weeks in a row. Overhead there is significant resistance near 3200. If there is a correction lower we can look for support in the 3050 area.

chart of the NASDAQ Composite index:

The small cap Russell 2000 index continues to show strength with a +1.3% gain last week. It is up +6.5% year to date. Right now the $RUT is pushing past what should have been round-number, psychological resistance at the 900 level. I will confess the four-week rally is impressive but the $RUT is overbought here and due for some profit taking. The 880 level could be short-term support but I would focus on its old highs. Broken resistance tends to be new support so that means a dip back toward the 870-865 region. If the rally continues then look for potential resistance near 920.

chart of the Russell 2000 index

We have discussed the transports before. The rally in the transportation sector is bullish for the overall market. Dow Theory suggests that we cannot have a sustained market rally unless the transports participate. Lately this group has been leading the charge higher. Seriously, the transports are screaming. The Dow Jones Transportation Average was up +3.0% last week. It's up +10.6% in 2013 and up +20% from its November 2012 lows. These are new all-time, record highs for the average. However, you can see from the charts below that the transports are very overbought and way overdue for a pullback. The pullback will happen. It's only a matter of time.

On the daily chart below I have added two different Fibonacci retracement tools. One from the November lows to 5900 and the other from support near 5200 to 5900. There is some convergence near the 5500 level. That coincides relatively well with old resistance back in the year 2011. When the correction occurs, I would expect a dip back to the 5600-5500 area.

chart of the Dow Jones Transportation Average

Weekly chart of the Dow Jones Transportation Average

Economic Data & Event Calendar

This week in front of us brings both the end of January and the first day of February. Thus we'll see a number of economic reports. The key economic reports to watch will be the preliminary Q4 U.S. GDP estimate, the ISM index, the Chicago PMI, and of course the non-farm payroll (jobs) report. Right now estimates are for +155,000 new jobs in January. The big "event" of the week will be the FOMC meeting on Wednesday. No one expects any change in rates.

One of the biggest events of the week will be the continuation of earnings season. Right now the Q4 earnings season is in full swing. Nearly 250 companies will report earnings during the week. About 20% of the S&P 500 components will report. Thus far the earnings season has been pretty good, unless you were long AAPL or short NFLX. The bullish trend should continue but momentum will likely begin to slow down both in quality of earnings and guidance and reaction to the news.

Economic and Event Calendar

- Monday, January 28 -
Durable goods orders
Pending home sales

- Tuesday, January 29 -
Case-Shiller 20-city home price index
Consumer Confidence

- Wednesday, January 30 -
ADP employment change report
preliminary Q4 U.S. GDP estimate
FOMC interest rate decision

- Thursday, January 31 -
Weekly Initial Jobless Claims
Personal income and spending
Chicago PMI data
Chinese PMI data

- Friday, February 01 -
Non-farm payrolls (jobs) report for January
Unemployment rate
ISM index
construction spending
auto and truck sales

The Week Ahead:

As we look ahead I think it's time we turn a little more cautious here. Yes, the trend is up. However, stocks don't move in a straight line for very long and right now most of the major indices are all up four weeks in a row. The S&P 500 index and Russell 2000 are technically "above" resistance at 1500 and 900, respectively but they haven't risen enough to call it a bullish breakout past these levels.

I am not calling a top right here but if the market were to reverse here it would make sense. The rally in the transportation average, while impressive, is very worrisome. The transports are very overbought and due for some profit taking. Imagine a rubber band, the harder you pull it one direction the bigger the snap back. The pullback in the transports could look ugly. A correction across the market would be both normal and healthy. However, it may not happen. Stocks can always grow more overbought. The catalyst that finally sparks profit taking could be the FOMC interest rate decision on Wednesday (more accurately it would be the Fed's commentary that goes with their decision), or the catalyst could be the jobs report on Friday, Feb. 1st. or something else entirely.

The all-time highs for the Dow Jones Industrials are less than 300 points away. The all-time highs for the S&P 500 index are less than 75 points away. These levels could act like new targets for the market but the profit taking could begin before we actually get there. If you look at a long-term chart you'll notice the S&P 500 peaked in the year 2000, the year 2007, and now we're nearing these levels again. That is raising concern of a potential triple top. We'll have to wait and see.

Outside of the market there are some geo-political issues to be aware of. Concerns over Iran's nuclear ambitions could come to the forefront again. Meanwhile Israel said they might be forced to use a pre-emptive strike to stop Syria's chemical weapons from falling (or being given) to terrorist organizations like Lebanon's Hezbollah or Al Qaeda (source: CBSnews). A move by Israel into Syrian airspace could raise tensions in the area and provoke other third parties to get involved with Syria's civil war. These could be potentially bearish developments for the financial markets.

James