Fears that the eurozone crisis might resume if uncooperative leaders were elected in Italy's recent election shook the markets for a day. Last Monday (Feb 25th) witnessed the global stock markets stumble following the Italian elections the day before. The S&P 500 index fell to four-week lows. Yet there was no follow through on the sell-off. The U.S. market's rebounded as traders bought the dip. The Dow Jones Industrial Average is actually showing relative strength and poised to hit new highs soon.

There was a wave of economic data hitting the markets as we closed the month of February. Plus the markets digested the semiannual Humphrey-Hawkins testimony where the Federal Reserve Chairman gives testimony before the U.S. House and Senate finance committees. Continued weakness in the euro and pound currencies fueled gains for the U.S. dollar. This dollar strength continued to feed the sell-off in commodities like gold, silver, copper and oil. The U.S. bond market bounced on Monday's stock market sell-off but spent the rest of the week churning sideways.

The second estimate on the U.S. fourth quarter GDP was release last week. Economists were expecting a revision from -0.1% to +0.5%. Yet the Commerce Department only bumped their estimate to +0.1%. At this level the last quarter of 2012 had the slowest growth since Q1 of 2011. Overall most of the domestic economic news was better than expected. The ISM manufacturing index rose from 53.1 in January to 54.2 in February. Numbers above 50.0 indicate growth and expansion and February's reading was the best since June 2011. The Chicago PMI was a positive surprise at 56.8 - an eleven month high. Analysts were expecting a dip from 55.6 to 54.0.

The weekly initial jobless claims fell -22,000 to 344,000. New home sales rallied +15.6%. The Case-Shiller home price index rose +6.8% from a year ago, posting its biggest year-over-year gain in six years. Pending home sales in January hit their best levels since April 2010 thanks to a +4.5% surge. This reverses a -4.3% plunge the month before. The final reading for February's consumer sentiment numbers increased from 76.3 to 77.6. Vehicle sales in February hit an annualized pace of more than 15.0 million.

In not so sunny news the Kansas City Fed manufacturing survey plunged to a -10 reading when economists were only expecting -1. The January durable goods orders saw a headline number of -5.2%, which was worse than expected and well below the prior month's +3.7% gain. Minus the more volatile transportation numbers, and a -45% drop in defense and nondefense aircraft orders, the durable goods orders were up +1.9%. You may have heard that personal income in January plunged -3.6% for the biggest one-month drop in 20 years. November saw a +4.2% increase and December saw a +2.6% jump in personal income but that was likely due to corporate America pushing bonuses and dividends into 2013 to avoid higher taxes in 2013.

There was plenty of data overseas. The Eurozone CPI (consumer inflation) data rose +2.0%, which was in-line with estimates. Unfortunately the Eurozone's unemployment has risen to 11.9% in January, which is the highest level since they began keeping records in 1995. Another challenge is the slowing PMI readings across Europe. A slowdown in manufacturing in France, Italy and Spain contributed to a 47.9 PMI reading for the Eurozone. Numbers under 50.0 indicate contraction or recession. Some of the regional data points continue to worsen. Consumer spending in France fell -0.8%, which was worse than expected. Spain's Q4 GDP estimate was revised down to -0.8% from -0.7%.

Economists are also worried about a potential slowdown in Asia. South Korea saw its retail sales fell -2.0% versus estimates for a small gain. Japan also said their retail sales fell -1.1% for the month. Japan reported that their manufacturing PMI came in at 48.5, which was improvement over the prior month's 47.7. Yet the Bank of Japan downgraded their growth forecasts. China's manufacturing PMI data was a disappointment with a drop to 50.1 in February, down from 50.4 in January. February's reading is the lowest level in five months. Numbers above 50.0 indicate growth but this figure is slipping lower. It's possible that China's PMI slowdown is a reflection of the weeklong Lunar New Years festival (holiday). That would suggest Chinese manufacturing should pick up again in March.

One of the biggest events of the week was the U.S. sequestration deadline that hit on March 1st. There was plenty of fear mongering about how the sequestration budget cuts might impact the U.S. economy but the stock market didn't seem to care. The $45 billion in cuts was from increased U.S. spending. The country will still spend more in 2013 than we did in 2012, just at a slower pace. There are plenty of projections on how the sequestration will affect the U.S. economy. Most estimates suggest that these government spending cuts could shave off -0.6% to -1.0% from the U.S. GDP. Plus, the country could see 750,000 to 1.5 million job losses.

Major Indices:

The S&P 500 index managed to eke out a +0.17% gain for the week in spite of Monday's big drop. For the year this large cap index is up +6.4%. Last weekend I cautioned readers to look for resistance 1520 and 1530 and likely support at 1480 and 1460. The S&P 500 hit 1485 and bounced. It also failed twice near 1525. Thus, it is still within the prior range.

A close above resistance at 1530 could fuel some short covering. Technical traders could argue that the S&P 500 is creating an inverse or bullish version of a head-and-shoulders pattern over the last week and a half. The 1525 level could be the neckline on this pattern (see charts below). If the market were to correct lower I would still expect a dip toward 1480-1460. Odds probably favor a pullback toward the 1460-1450 zone.

Plus, the weekly chart still shows resistance near a long-term trend line and there is still a risk that the S&P 500 could form a bearish triple top (displayed on the long-term monthly chart last week).

chart of the S&P 500 index:

Weekly chart of the S&P 500 index:

Short-term chart of the S&P 500 index:

The NASDAQ composite briefly spiked below technical support at its rising 50-dma and the 38.2% Fibonacci retracement level on Tuesday morning (following Monday's big drop). It's interesting to note that the NASDAQ has also spent most of the week trading inside Monday's big range. Bulls and bears have their talking points. The 50-dma remains technical support (for now) but Monday's high and the prior highs near 3200 are still overhead resistance. Essentially the index is consolidating sideways and churning for a breakout one way or the other. On the intraday chart you'll find a similar inverse H&S pattern building like the one seen on the S&P 500.

If the NASDAQ can breakout past the February highs, near 3215, then look for the rally to continue. Otherwise, we may want to plan on a correction lower toward the 3050 area. For the week the NASDAQ gained +0.25% and is up +4.9% year to date.

Weekly chart of the NASDAQ Composite index:

The small cap Russell 2000 index is hanging in there. The index did post a -0.16% loss for the week but it's still up +7.7% year to date. The big drop on Monday found support at the 40-dma and traders bought the dip at this moving average throughout the week.

The pullback from its February high did break the trend of higher low but there hasn't been any follow through lower. You could say that the $RUT is coiling in a neutral pattern and will see a breakout, one way or the other, soon. If the $RUT moves higher the February high near 930 is short-term resistance. If the $RUT breaks down then look for support near 870.

chart of the Russell 2000 index

Economic Data & Event Calendar

It's the beginning of the month and that means the normal parade of economic data. This week the big events to watch are probably the ECB interest rate decision and the U.S. non-farm payroll (jobs) report. The ECB rate decision will be followed by a press conference with ECB President Draghi.

Economic and Event Calendar

- Monday, March 04 -
Eurozone PPI

- Tuesday, March 05 -
ISM services
Eurozone services PMI
Eurozone GDP estimate

- Wednesday, March 06 -
ADP employment change report
factory orders
Federal Reserve Beige book report

- Thursday, March 07 -
Weekly Initial Jobless Claims
European Central Bank (ECB) interest rate decision
ECB President Mario Draghi press conference
Bank of England interest rate decision
Bank of Japan interest rate decision
Japan GDP estimate

- Friday, March 08 -
non-farm payrolls (jobs) report
unemployment rate
wholesale inventories

Additional Events to be aware of:

Mar. 20th - FOMC meeting & Bernanke press conference
Mar. 27th - U.S. budget resolution expires
Apr. 15th - U.S. new budget resolution deadline
May 18th - U.S. debt ceiling deadline

The Week Ahead:

Last weekend I suggested that the stock market was in a state of flux. The upward momentum had been severely challenged and the trend was in jeopardy. Monday's big sell-off following the Italian elections didn't help the bulls. Yet there was no follow through lower. Essentially the market remains in flux. Even though stocks are still technically overbought the rally could continue. I am hearing more warnings that we're nearing a significant top but many fund managers don't have a lot of choices. They could invest in U.S. ten-year bonds with a 1.8% yield or stay invested in stocks. Their challenge, and ours, is what could be a slowing U.S. and global economy.

A good chunk of Europe is already in recession. The latest data out of China was disappointing but we'll have to wait another month to see if that was just a temporary dip due to the country's weeklong holiday. The U.S. Q4 GDP was revised slightly higher at +0.1% but that was still way below estimates. Meanwhile the U.S. sequestration budget cuts are expected to shave off between -0.6% to -1.0% of our GDP. We're still faced with two more big political battles in Washington with the budget talks and the debt ceiling issue over the next couple of months. The gridlock and failures in Washington could generate negative investor sentiment.

The U.S. consumer is facing higher taxes and rising gasoline prices. The combination could spell trouble for retailers. Consumer spending accounts for nearly 70% of the U.S. economy. Now add decreased government spending to what might be a cautious consumer and the U.S. could be faced with a potential recession this year. Another troubling sign is the sharp rise in insider selling of stock. The recent surge of company executives rushing to sell stock with the market at multi-year highs does not promote investor confidence. Essentially this is a signal that insiders believe their company stock is near a top and they want to sell now before it declines.

I don't want to preach gloom and doom here but the market is still due for a correction lower. There seems to be a shortage of potential catalyst to drive stocks higher. There are plenty who believe that the only reason asset prices are rising is due to the Federal Reserve's QE program. That's why every time there is a hint or a shadow that the Fed might slow down their QE buying the stock market shudders.

You also have to consider that bull markets tend to climb the wall of worry. I just listed a handful of bricks in the wall. The S&P 500 index is only about 50 points away from its all-time high. There's certainly a chance we see a last gasp surge higher to tag its highs or even inch up and over to mark a new all-time high and then reverse lower.

Issues that could be market events over the next few months are: geopolitical risk between Japan and China, geopolitical risk between Iran and Israel (and the U.S.), any sudden deterioration in the Eurozone as they continue to deal with their financial cancer.

James