The current bull market in stocks turned four years old this past week. From the first week of March 2009 to March 2012 the S&P 500 index has rallied from a closing low of 683 to 1551 for a +127% gain. It's the fifth longest bull market since 1928. Investors applauded the positive economic news, ignored the not so positive economic news, and failed to react to North Korea's threat to nuke the U.S. and reignite the Korean war.
The U.S. dollar continues to rally and it's now up five weeks in a row. This is putting pressure on commodities, especially precious metals. Oil prices did manage a bounce this past week but gasoline prices have finally started to recede after a multi-week surge higher. The rotation out of bonds and into stocks, while debated, still appears to be happening with yields on the 10-year treasury surging to multi-month highs at 2.0%.
The U.S. saw a number of economic reports last week. Productivity gains fell -1.9% for its biggest drop in four years. Factory orders for January reversed with a -2.0% dip following a downwardly revised +1.3% gain in December. The ISM services index February reading improved to 56.0, up from 55.2 in January. This marks a 12-month high. The Federal Reserve released their Beige Book report, which continues to claim the 12 districts saw "modest to moderate" growth. The weekly initial jobless claims dipped to a six-week low at 340,000, down from 347K the prior week.
Investors were focused on the U.S. labor market. The ADP employment change report came in at +198,000 new private-sector jobs in February. Economists were only exiting +170K. The big number to watch was the Labor Department's nonfarm payrolls (jobs) report for February, which came out Friday morning. Analysts were expecting +160,000 new jobs. Friday's report said the U.S. gained +236,000. January's jobs number was revised lower -38K to +119K while December's was revised higher by +23K to +219K.
The unemployment rate dipped to a four-year low at 7.7% but only because there was a drop in the labor force participation rate (LFPR). The labor force lost 130,000 workers and the participation rate contracted -0.01% to 63.5%. We haven't seen a LFPR this low in more than thirty years. Four years ago the LFPR was 65.6%. Without this contraction in the LFPR the unemployment rate would be 11.4% not 7.7%.
There was plenty of economic action overseas. Japan's Q4 GDP growth was revised from -0.1% to +0.0%. Meanwhile Japan's Center for Economic Research just released their estimate that Japan's GDP improved to +0.2% in January. The Bank of Japan left their interest rate unchanged in the 0.00%-to-0.10% range and left their quantitative easing at 101 trillion yen. No surprises here but there are rumors that Japan might be poised to pick up the pace on its QE program. This past week saw the yen fall to new three-year lows.
Meanwhile across the East China Sea the Chinese held their National People's Congress and affirmed their 2013 GDP growth target of +7.5%. China's HSBC services PMI contracted from 54.0 to 52.1. Numbers above 50.0 indicate growth while numbers below 50.0 indicate contraction.
Last Tuesday the Eurozone finance ministers met in Brussels again. The meeting failed to generate any market-moving headlines.
France saw its unemployment rate hit a 13-year high with a jump to 10.6%.
Italy was downgraded from "A-" to "BBB+" by the Fitch Ratings agency and given a negative outlook for possible downgrades in the future.
The Eurozone reported that its retail sales rose +1.2%, which was significantly higher than expected. The Eurozone estimate on Q4 GDP came in at -0.6%, which was in-line with estimates. The ECB left their interest rate unchanged at 0.75% and warned that the Eurozone would see its economy contract by -0.5% in 2013, which is worse than its previous estimate of -0.3%.
In other news the Federal Reserve released the results of their latest CCAR report (a.k.a. bank stress tests). All but one of the 18 banks tested were given a passing grade. Ally Bank was the only one that failed as the Fed estimates that Ally's Tier 1 capital requirements would fall to 1.5% in their test simulation. If you're curious Ally Financial used to be GMAC Inc. They trade on the NYSE under symbol GKM.N. Shares of Ally didn't move that much last week compared to the rest of the financial sector, which is in rally mode.
The S&P 500 index has rallied six days in a row and closed at new five-year highs. For the week the large cap index is up +2.1%. The breakout past its mid February high near 1530 is technically bullish but the index is looking overbought again.
The S&P 500's all-time intraday high is 1576.09 set on October 11th, 2007. The closing high is 1565.15 from October 9th, 2007. It's only 15 points away from this closing high. Last week at the bottom of my commentary I cautioned readers that we could see the market produce a last gasp surge higher that would push the S&P 500 to tag its historic high before seeing a correction lower. Now I can't promise that the market is going to correct lower but the 1565-1575 area is now overhead resistance. I do expect the S&P 500 to hit this area. Whether or not it breaks out to new all-time highs is the real question.
We've been warning readers that until the S&P 500 does breakout past its old highs it is in danger of forming a massive triple-top (bearish) pattern. It's also worth noting that the S&P 500 has been building a widening or broadening megaphone shaped topping pattern.
chart of the S&P 500 index:
Weekly chart of the S&P 500 index:
Monthly chart of the S&P 500 index:
Short-term chart of the S&P 500 index:
The NASDAQ composite delivered a +2.3% gain for the week and managed to do so without any real help from its largest component: Apple Inc. (AAPL). The NASDAQ also pushed past resistance near the 3200 level to close at new 12-year highs.
Weekly chart of the NASDAQ Composite index:
Monthly chart of the NASDAQ Composite index:
The small cap Russell 2000 index displayed relative strength last week with a +3.0% gain. The $RUT also broke out to new all-time, historic highs. It's possible that the 950 level might be round-number resistance but this is blue-sky territory. I am posting a Point & Figure chart from stockcharts.com and it is forecasting a long-term bullish target of 1,025.
chart of the Russell 2000 index
Point & Figure chart of the Russell 2000 index
Economic Data & Event Calendar
The event and economic calendar slows down this week. The U.S. will see both the PPI and CPI, which provide a wholesale and consumer level look at inflation. Italy was just downgraded on Friday so investors will be watching Italy's bond auction on Tuesday to see how the market reacts. A poor debt auction could spark trouble for the equity markets.
Economic and Event Calendar
- Monday, March 11 -
Eurozone Industrial Production data
India's interest rate decision
- Tuesday, March 12 -
Italy holds a 10-year bond auction
- Wednesday, March 13 -
Retail Sales for February
- Thursday, March 14 -
Weekly Initial Jobless Claims
Producer Price Index (PPI) for February
EU Economic Summit
- Friday, March 15 -
Consumer Price Index (CPI) for February
New York Empire State manufacturing survey
Industrial Production & Capacity Utilization
University of Michigan Consumer Sentiment
Additional Events to be aware of:
Mar. 20th - FOMC meeting & Bernanke press conference
Mar. 27th - U.S. budget resolution expires
Mar. 29th - U.S. market closed for Good Friday
Apr. 15th - U.S. new budget resolution deadline
May 18th - U.S. debt ceiling deadline
The Week Ahead:
Looking at the week ahead momentum clearly favors the bulls. The S&P 500 has broken out to new five-year highs and is only 15 points away from its all-time closing high. This old high will act as a magnet. I fully expect the S&P 500 to reach this level and likely surpass it. However, I'm worried that hitting the old high could be a trigger for traders to sell. If the market does see selling after the S&P 500 hits these levels from October 2007, the question will be is this just normal, short-term profit taking, or something worse? Are we seeing a triple top forming? Obviously a strong breakout past the old highs would be very bullish for investor sentiment and likely fuel another round of short covering.
Bears will argue that stocks are getting overbought again but we all know that stocks can always grow more overbought. The bulls have a lot going for them. The small caps are leading the way with the Russell 2000 index at all-time highs. Dow Theory investors should be happy with the strength in the transportation sector with the transportation average near an all-time high. The financials are participating with the financial sector at four-year highs. Another favorable development for the bulls is strength overseas. The Japanese NIKKEI, the British FTSE, and the German DAX indices are all at multi-year highs.
chart of the Japanese NIKKEI index
chart of the British FTSE index
chart of the German DAX index
Bears can also argue that the global economy is still weak. The U.S. economy only grew +0.1% last quarter and the combination of the fiscal cliff deal, recent tax hikes, and the sequestration budget cuts could shave off -1.5% from the GDP. That would push the U.S. back into recession. On top of that the payroll tax increase and the high price of gasoline should be a negative for consumer spending.
The wild card could be geopolitical risk. Syria continues to burn in a civil war and the U.S. is getting more involved by funding the rebels. Egypt seems to be growing more volatile. We will likely see a showdown between Israel and Iran before summer is over. China and Japan are gearing up for a fight over some disputed islands. Now North Korea has canceled the 1953 armistice agreement (ceasefire) with South Korea, which means the two countries are officially back in a state of war. It would appear that the Korean peninsula is preparing for war. Everyone is hoping this is just another N. Korean bluff and praying that the N. Korean leader Kim Jong-un doesn't pull the trigger.
If geopolitical issues don't scare the market then we have the U.S. budget fight resuming in late March and the U.S. debt ceiling fiasco returns in May. Believe it or not the Q1 earnings season is only about a month away. Corporate earnings results will either keep the rally alive or kill it. Thus far every concern has proved to be another brick in the wall of worry that bulls continue to climb. Until the U.S. Federal Reserve decides to slow down their QE programs, they will be a tailwind pushing equities higher.