Another week of gains has pushed the S&P 500 index to within five points of a new all-time, historic high. Market participants waded through another week of mixed economic data. Europe is ignoring the political mess in Italy, which is still without any leadership following the last election. Meanwhile the situation in Greece seems to be deteriorating again but the markets don't care. Oil bounced. Gold and silver churned sideways. Bonds hovered near their recent lows. Equities pushed higher although leadership is narrowing. Worries of a potential triple top in the S&P 500 remain but the volatility index (VIX) has fallen to new multi-year lows suggesting a lack of any real fear by traders.

The economic data in the U.S. was definitely mixed. Retail sales came in at +1.1% in February, up from +0.2% in January. February's results were definitely better than expected. Another positive was the initial weekly jobless claims, which slid -10,000 to 332,000. That's a new relative low and the trend seems to be improving. The University of Michigan Consumer Sentiment survey fell from 77.6 to 71.8. That was significantly worse than expected. The sentiment index hasn't been this low since December 2011. There seems to be a divergence between falling sentiment and rising retail sales.

The Producer Price Index (PPI) for February showed a +0.7% jump in inflation at the wholesale level. That was the biggest one-month jump since last September. The Consumer Price Index (CPI) for February also came in hotter than expected with a rise from 0.0% a month ago to +0.7%. Rising inflation could be trouble. If inflation rises too fast the Federal Reserve will feel the need to cut back or end its QE programs. One month doesn't mark a trend but it's worth noting. The core-CPI, which excludes the more volatile food and energy prices, was only up +0.2%. Right now the core CPI is running at a 12-month pace of +2.0%. When the core hits 2.5% it could force the Fed to act and raise interest rates.

Elsewhere the New York Empire State manufacturing survey fell from 10.0 in February to 9.2 in March. Analysts had been expecting a drop toward 6 so the strength here was a bullish sign for the economy. Numbers above 0.0 are positive and show growth while negative numbers suggest economic contraction. Prior to February's surge to 10 the Empire State survey was negative for six months in a row.

Major Indices:

The S&P 500 index added +0.6% for the week. Year to date it's up +9.4%. That is a year's worth of gains in less than three months. It's up more than +15% from its November lows. The old high near 1565 and the old intraday high at 1576 will probably be overhead resistance. We should expect some profit taking soon. The challenge will be trying to discern between normal, short-term profit taking like we saw back in late December and mid February or an actual bearish reversal.

Normal corrections fall in the -5% to -10% range. We were lucky with the dips n December and February. Those pullbacks were only about -3%. A -5% correction from 1565 (the old closing high) would be 1486. A -10% correction would be 1408. Now there is no guarantee the market will correct lower from current levels but odds are rising. Technical oscillators are in overbought territory. On the daily chart below you can see the S&P 500 seems to be rising in a lopsided channel. If this trend continues then the next pullback might find support between the 40 and 50-dma (currently around 1520).

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 lagged behind the other major indices with a +0.14% gain on the week. It's only up +7.6% year to date. It is worth noting that the NASDAQ did hit new 12-year highs.

If the market sees a dip there is probably support near 3200 and near the rising 50-dma.

Weekly chart of the NASDAQ Composite index:

The small caps are still showing relative strength, which is a good sign for the market's rally. The Russell 2000 index added +1.0% last week and is up an impressive +12.1% year to date. The $RUT is looking short-term overbought here but it's in blue sky territory and it can always grow more overbought than you and I think it can. Odds are good that the 1,000 level could be significant round-number, psychological resistance. On a short-term basis there appears to be support near 940 and if that fails look for support near the 40-dma.

chart of the Russell 2000 index

Economic Data & Event Calendar

The economic report and event calendar slows down this week. There will be two main items to watch. First and foremost will be the Federal Reserve's FOMC meeting on Wednesday. No change is expected in policy. Fed Chairman Bernanke will follow that with a press conference. His comments and answers always have the potential to be a market-moving event. The next item to watch is probably the Philly Fed survey.

Economic and Event Calendar

- Monday, March 18 -
(nothing significant)

- Tuesday, March 19 -
Housing Starts & Building Permits
German ZEW sentiment index

- Wednesday, March 20 -
FOMC meeting & Bernanke press conference
China's HSBC PMI manufacturing data

- Thursday, March 21 -
Weekly Initial Jobless Claims
Existing Home Sales
Philadelphia Fed survey
Eurozone PMI data

- Friday, March 22 -
(nothing significant)

Additional Events to be aware of:

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 ahead it's record-breaking time for the S&P 500 index. Will it break out or will it reverse? I do expect to see a new closing high soon (a close above 1565). The financial media will explode with cheers about the market at an all-time high. Don't get caught up in the euphoria. Stocks are overbought and due for a correction. Anybody who bought "the market" back in 2007 has been praying for this day to come so they can get out where they got in. I encourage you to back and look at a long-term chart. From the highs in 2007 it took less than two years for the market to be cut in half. It's taken four years to climb back.

It's completely possible that stocks breakout to new all-time highs and keep going. I find that possibility unlikely but it is possible. The trend is up so it's too dangerous to try and call a top and start launching bearish positions. That doesn't mean we can't scale back on some winning positions to take some money off the table. I would also encourage everyone to re-evaluate your stop loss placement. If the market produces a normal -5% or -10% correction, how will your portfolio perform?

My comments about geopolitical risk last week still apply today. Closer to home we're going to start hearing about Q1 earnings season, which is about a month away. A disappointing earnings season could kill this rally pretty quickly. Personally, with the S&P 500 sitting right below what could be significant resistance I would not be in a rush to launch new bullish positions.

James