Has the bull market in stocks finally stalled? That depends on where you look. There were plenty of headlines last week from President Obama's state of the union address to North Korea testing another nuclear bomb. There was a genuine mix of economic data both good and bad. The Dow Jones Industrial Average has been stuck trading near the 14,000 level. Over the last two weeks the volatility in the DJIA has collapsed to its lowest level in 26 years. The index has essentially flat-lined. For the 30-component Dow the upward momentum has definitely stalled.

The tech-heavy NASDAQ has also stalled at resistance near the 3200 level. Yet the S&P 500 index extended its gains to seven weeks in a row. Meanwhile both the small cap Russell 2000 index and the Dow Jones Transportation Average continue to set new all-time, record highs. The U.S. dollar continues to bounce from its February lows. The dollar's rise may have helped stall the rally in oil. Meanwhile precious metals, especially gold, got hammered lower.

There was plenty of foreign economic data this past week. Both the U.K. and India expressed concerns about rising inflation. India's industrial production fell -0.6%. French industrial production dipped -0.1%. The Eurozone's industrial production rose +0.7%, which was better than expected. Japan said their industrial production surged +2.4%.

One of the big surprises was the negative GDP estimate for Eurozone's Q4 GDP. Analysts were expecting -0.4% GDP growth. Yet thanks to negative GDP growth in Germany, France, Italy, Portugal and Greece, they helped weigh down the overall Eurozone GDP, which came in at -0.6% for the fourth quarter of 2012. Germany is the biggest and strongest member of the Eurozone and their -0.6% Q4 GDP estimate is troubling.

One of the hot topics right now in global economics is currencies. Many are worried that Japan has kicked off a currency war by devaluing the yen. One of the topics at the G20 meeting this weekend, that began on Friday, was whether the EU would try and weaken the euro currency. There is a growing concern that the rise in the euro could choke off the region's recovery efforts, especially for the weakest Eurozone members.

In the U.S. the economic data was mixed. Our own industrial production fell -0.1% in January from +0.4% in December. Retail sales for January came in at +0.1%, which was disappointing. On the plus side the initial weekly jobless claims fell -27,000 to 341,000. The New York Empire State manufacturing survey surged from -7.8 to +10.0. That's the first time this survey has been in positive territory since the summer of 2012. We also saw a bounce in consumer sentiment with February's reading rising from 73.8 to 76.3. This is a three-month high. Strength is consumer sentiment is surprising when you consider rising gasoline prices and higher taxes are taking a chunk out of our discretionary spending. Unfortunately we are not seeing any follow through in business owner confidence. The latest survey of small business owners shows that their confidence remains near record lows.

Another reason the bounce in consumer sentiment is a surprise was a story about Wal-Mart (WMT) on Friday. The retail titan made headlines when Bloomberg printed a story Friday morning regarding February sales. Somehow Bloomberg got a hold of an internal email from WMT's VP of finance and logistics. In his seven years with the company the VP said the first two weeks of February were the worst start to any month he had ever seen. He called February MTD sales a "total disaster." WMT executives are suggesting that the increase in payroll taxes starting January 1st, when congress let the payroll tax holiday expire, and the combination of delayed tax refunds were impacting their customers available cash. I'm sure the constant rise in gasoline prices is also impacting sales. Shares of WMT gapped open lower on Friday morning and spiked down toward $68 a share before paring their losses.

Speaking of losses, it was a rough week for gold. Gold futures plunged -$58 with a fall toward $1,610 an ounce. It was the biggest one-week drop in three years. Expectations for an improving economy and news that big investors were cutting their gold exposure were to blame. Recent SEC filings unveiled that several big investors and hedge funds had reduced or completely liquidated their gold investments. Two of the bigger names mentioned were billionaire investor George Soros and Louis Moore Bacon. Soros cut his gold ETF (GLD) exposure by 55% down to 600,000 shares. Mr. Bacon's Moore Capital Management completely closed their GLD position. This news probably hurt investor sentiment for the GLD.

The drop in gold is surprising when you think about the big picture. I don't know very many people who have positive expectations for a growing economy. UBS did lower their gold target based on potential improvement in the U.S. and Chinese economies. Yet the U.S. GDP was negative last quarter and if the sequester hits in March it will likely shave off another -1% in GDP growth. The EU area is currently in recession so we're not likely to see any growth there. Furthermore all the major central banks are exercising some form of QE or stimulus that should be inflationary, which drives their currencies lower and commodities higher.

Long-term gold should be going higher. The central banks know this and that's why they have been buying gold. Gold purchases by central banks surged +17% in 2012 over the prior year, hitting 534 tons. That's the highest level of gold purchases since the year 1964. In the fourth quarter of 2012 central banks pushed their gold buying to 145 metric tons. That was the eighth quarter in a row of increased gold buying by banks.

South Korea, Turkey, Brazil, Iraq, the Philippines, and China have been buying gold for months. Last week there were big headlines about how Russia has been buying so much gold over the last several years that the country's gold reserve has hit 570 tons. That's three times the weight of the statue of liberty. If these countries thought gold was going lower they would not be buying it. The recent sell-off just looks like a knee-jerk reaction to some short-term headlines.

Major Indices:

The S&P 500 index posted its seventh weekly gain in a row. Yet momentum has definitely slowed. Last week's gain was less than two points (+0.1%). Traders sold the rally twice near 1524 but they also bought the dip at the rising 10-dma. Thus the trend is still up but the index has failed to breakout past the long-term trend line on the weekly chart below.

I am urging caution here. The combination of slowing momentum and the quickly approaching sequestration deadline in Washington on March 1st could provoke a correction lower in stocks. Odds are good than when the correction does hit we could see this index dip into the 1480-1450 zone.

chart of the S&P 500 index:

Weekly chart of the S&P 500 index:

Monthly chart of the S&P 500 index:

The NASDAQ composite saw its rally stall right at resistance near the 3200 level. A pullback here would spark concerns of a bearish double top pattern. Any correction lower would likely produce a pullback toward the 3100-3000 area.

Weekly chart of the NASDAQ Composite index:

The small cap Russell 2000 index continues to show relative strength. This index hit another round of new all-time highs. While strength in the small caps is very bullish for the broader market the index cannot go straight up forever. It will see a correction sooner or later. After a +20% rally from its November low it's way overdue for a pullback.

I have adjusted the Fibonacci retracement tools on the daily chart below to show you some what if scenarios. If the $RUT were to pullback from the 930 level what levels might offer support? The 900 level could offer some round-number support but I would probably look for a dip near the 880-860 zone.

chart of the Russell 2000 index

Economic Data & Event Calendar

The economic and event calendar slows down this week. The U.S. markets are closed on Monday, Feb. 18th for President's day. The big event for the week could be the release of the FOMC minutes. Fed president Bernanke claims they will keep using QE until unemployment comes down to 6.5% but there seems to be plenty of dissenters on the Federal Reserve's board. This week will also provide a look at inflation on both a wholesale and consumer level with the PPI and CPI reports. We'll also get another look at the Eurozone GDP estimate.

Economic and Event Calendar

- Monday, February 18 -
U.S. markets are closed for President's Day

- Tuesday, February 19 -
Germany's ZEW sentiment survey

- Wednesday, February 20 -
Housing Starts & Building Permits
Producer Price Index (PPI)
FOMC Minutes

- Thursday, February 21 -
Weekly Initial Jobless Claims
Consumer Price Index (CPI)
Existing Home Sales
Philadelphia Fed Survey
Eurozone manufacturing data

- Friday, February 22 -
Eurozone GDP estimate

Additional Events to be aware of:

Feb. 24th - Italian elections
Mar. 1st - U.S. sequestration deadline
Mar. 20th - FOMC meeting & Bernanke press conference

The Week Ahead:

The Q4 earnings season is finally over. Overall earnings season was pretty good thanks to low expectations. The challenge now is finding the next catalyst to drive stocks higher? Unfortunately, the next big event is likely to drive the market lower. March 1st, 2013 is the sequestration deadline for the across the board government spending cuts to kick in. That's going to cut $90 billion in government spending for 2013. Estimates are projecting a -1% drop in U.S. GDP and between -1.0 million to -1.4 million lost jobs.

The Q4 U.S. GDP number was negative at -0.1%. A negative Q1 GDP estimate would officially put the U.S. back into a recession. I suspect that the Q4 GDP number will get revised higher. However, it does illustrate how weak the U.S. economy is. If we let the sequestration cut another -1% off the GDP then odds are very high the U.S. will fall back into recession.

Another issue that appears to be putting pressure on the economy is lower consumer spending. Best estimates suggest that consumer spending accounts for 70% of the U.S. economy. When congress let the payroll tax holiday expire on January 1st, 2013, that raised taxes on most employees. Combine that with a multi-week rise in gasoline prices and it creates a painful headwind for consumers. Right now analysts expect the up trend in gasoline to continue.

Investors should also be concerned about market sentiment. Right now the CBOE volatility index, the VIX, has fallen to lows not seen since 2007. Extreme levels of complacency are a warning signal that the equity market could be nearing a top. Now how are investors going to react when we see another heated battle in Washington as we approach the March 1st sequestration deadline. Just a few weeks after that will be the political battle over the U.S. debt ceiling (again).

Right now the market's trend is up but stocks are overbought. Of course they can always grow more overbought. I strongly suspect that equities will see a correction within the next two or three weeks. Therefore I would hesitate to launch new long-term bullish LEAPS positions when we will see a much better entry point a few weeks down the road.

James