We should all send Mr. Bernanke and the Federal Reserve a "thank you" card. It was the Fed's QE program that helped fuel a year's worth of gains into the first three months of 2013. Then again, the U.S. has been called the "cleanest shirt" in the dirty clothes hamper because everywhere else in the world looks worse than we do. Money had to go somewhere and a lot of it went into U.S. equities in the first quarter this year. Oddly enough calls for the "great rotation" out of bonds have subsided as money rushed back into U.S. treasuries over the last three weeks. Oil is on the up swing as well. It almost seems like the only asset not performing well right now is gold. Year to date the S&P 500 is up +10%. Oil is up +5.8%. Gold is down -4.7%.

We did just mark the end of the first quarter. End of quarter window dressing helped push the S&P 500 index to a new closing all-time high, above the 2007 peak. Over the last quarter we witnessed the current bull market's fourth birthday. Many have called this the most hated rally in history. That's probably because a lot of investors and fund managers were underinvested in equities. Transportation stocks and the small caps have helped lead the market higher off the November 2012 lows. Dow Theory investors should be happy to see the leadership in the transports.

Some of the key headlines this past week remain centered on Cyprus. The small country's banks finally reopened but with very strict capital controls. Meanwhile the political situation in Italy remains unresolved and the economy is tanking in France. The Cyprus robbery of bank depositor's money has pushed investors into safe haven trades like German bonds. The yield on a 10-year German bund fell to 1.28%.

There was a lot of economic data in the U.S. this past week. Initial jobless claims rose from 341,000 the prior week to 357,000. This is the highest reading in five weeks and the first time above 350K since mid February. Consumer sentiment was a positive surprise. A pullback in gasoline prices and new highs in the stock market buoyed sentiment. The consumer sentiment readings rose from an early survey of 71.8 to 78.6 by month's end.

A bump in housing prices may have also played a role in rising sentiment. The Case-Shiller 20-city home price index revealed a +8.1% year over year rise in home prices, up from +6.8% the prior month. Although not all the residential real estate data was positive. The new home sales pace fell -4.6% month over month in February. Pending home sales dipped -0.4% versus estimates for a gain. Of course a -0.4% decline was better than January's -3.8% decline.

Durable goods orders surged +5.7% compared to -3.8% the prior month. The Kansas City Fed manufacturing survey rose to -5. That's a big improvement from February's -10 but this survey has been stuck in negative territory for six months in a row. The Chicago PMI data was a disappointment with a drop from 56.8 the prior month to the latest reading of 52.4. Readings above 50.0 indicate growth and expansion but unfortunately this survey is moving the wrong way.

The final Q4 GDP estimate came in at +0.4%. That is improvement from the initial estimate of -0.1% but still extremely weak. Q4 was the slowest quarter in almost two years. We're still about four weeks away from the first estimate on Q1 growth. Right now consensus estimates are for +2.8%. That seems pretty optimistic following the anemic Q4 growth. The first quarter had to deal with the fiscal cliff and the sequester potentially depressing the economy. Right now Goldman Sachs is forecasting +3.4% Q1 growth while Merrill Lynch is estimating +3.0% growth.

There were plenty of overseas headlines. Italian politicians have been unable to cobble together a coalition government. That means the country, which is currently in recession, could be headed for another round of elections. The Bank of Italy warned that Italy's negative 2013 GDP growth could be worse than current estimates of -1.3%. In similar news Spain warned that their 2012 budget deficit would be larger than previously thought (shocker!).

Significant sections of the Eurozone are in recession. That's putting the brakes on any economic growth. The Eurozone retail PMI fell to 43.7 from the prior month's 44.5. Meanwhile the economic situation in France seems to be deteriorating quickly. A WSJ article is suggesting that France's recently raised taxes is hurting consumer spending and retail sales are plunging. France is one of the largest members of the Eurozone and analysts now expect the country's GDP to be negative for nearly all of 2013. The current recession in France could be worse than the 2008 recession and might quickly eclipse the recession in Italy.

We can't talk about Europe and the Eurozone without talking about the small Mediterranean country of Cyprus. After being closed for several days the country's banks finally reopened. The widely expected bank run failed to materialize. Armed guards at the major bank branches and extreme capital controls may have played a part in that. Cyprus citizens are only allowed to withdraw 300 euros a day and they can't leave the country with more than 5,000 euros.

We still don't know how big of a levy/tax/robbery that Cyprus bank depositors might face. It could depend on which bank people held their money. I've seen estimates for bank deposits above 100K euros facing a tax of 35%, 45% or 60%. According to Cypriot Finance Minister Michalis Saris depositors could see an 80% haircut. According to one private citizen, when the banks reopened, they looked at their account and 96% of all funds above the 100K euro limit were "blocked" and unavailable. As if that wasn't bad enough, there is a Cypriot newspaper claiming that the country's current president and his family moved "dozens of millions" of euros from Cyprus banks to London just weeks before the Cyprus banks were frozen and accounts involuntarily taxed.

Eurozone officials are desperately trying to back away from comments made by Jeroen Dijsselbloem. Mr. Dijsselbloem is the Dutch Finance Minister and president of the Eurogroup. On Monday, in a Reuters interview, Jeroen claimed that the Cyprus "restructuring" (a.k.a. stealing bank deposits from citizens) might be used as a model for future bank bailouts in the Eurozone. Of course it doesn't matter now what the Eurozone officials say. The cat is out of the bag. If the government is willing to steal money from bank deposits then citizens are not going to trust their money to the banks. Even though this entire fiasco was an attempt to "save" the banks this move may have doomed them. There will be a flood of money out of European banks, especially out of any of the weaker countries like Cyprus, Greece, Portugal, Spain, Italy, etc. That money will either find its way under the mattress or in other foreign countries. The Eurozone's blunder could be a small boon for the U.S. as Europeans move their money abroad. Unfortunately, this capital flight out of the EU will further weaken the EU banking system, which will only spark more bailouts and crises down the road.

Major Indices:

Four points! The S&P 500 has been hovering under resistance at its old all-time high of 1565 for two weeks. End of quarter window dressing finally pushed this index above resistance and settled the S&P 500 four points above the old high on the last day of the quarter. For the week the S&P 500 is up +0.79%. Year to date it's up +10.0%. From the 2012 November closing low of 1353 the index is up +15.9%. This marks the fifth monthly gain in a row for the S&P 500 index, which now has a market cap of almost $14 trillion.

So what now? The first few days of April should see new money flowing into mutual funds. Yet now that the quarter is over fund managers might do a little window undressing. Momentum clearly favors the bulls. Technically the breakout to new highs tends to fuel more new highs. The old all-time intraday high of 1576 could be overhead resistance. Some technicians don't consider any breakout a real breakout until it's +3% past resistance. If you subscribe to that philosophy then it would mean a rally to 1612 to confirm the breakout in the S&P 500.

If the market does see some profit taking the S&P 500 should see some support near 1540. Plus there should be some technical support near the 40-dma and 50-dma.

Overall I remain very concerned that the Q1 earnings season could derail the rally. Until the S&P 500 clearly moves past the old intraday high of 1576 there is still the risk of a major triple-top (seen most clearly on the monthly chart below).

chart of the S&P 500 index:

Monthly chart of the S&P 500 index:

The NASDAQ also broke out from its two-week consolidation. For the week the NASDAQ is up +0.69% and year to date it's up +8.2%. Thursday's close at 3,267 is a new 12-year high. The next level of resistance is probably the 3300 mark. Should the market retreat there appears to be short-term technical support at the 20-dma. If that fails then the 3200 level could be support, bolstered by the rising 50-dma.

Daily chart of the NASDAQ Composite index:

The small cap Russell 2000 index added +0.5% for the week but did not close at new all-time highs. However, it is less than two points away from a new record high. The current high was set two weeks ago at 953. Year to date the small caps are up +12.0%. From the November closing low of 769 the $RUT is up +23.6%.

Strength in the small caps is a good thing. Normally when fund managers get nervous they sell the small caps and move their money into more liquid large cap stocks. Right now the $RUT looks poised to breakout from its two-week sideways consolidation. If the $RUT does breakout we could see it surge toward the 965-975 area. Bigger picture the 1,000 mark could become a nice big round-number target. However, I seriously doubt the $RUT could get there before Q1 earnings season begins.

On a short-term basis there appears to be support near 940, 930, the 40-dma near 925, and if that fails then the 900 mark.

chart of the Russell 2000 index

Economic Data & Event Calendar

It's a new month and that means another round of monthly economic data. We'll see the U.S. ISM index, vehicle sales, and a number of Eurozone reports. Of course a new month also means an update on the labor market in the U.S. The jobs report is due out Friday morning and analysts are expecting a dip from +236,000 in February to +190,000 in March. If the number comes in too hot the market will worry about the Fed cutting back on QE earlier than expected. If the number comes in too cold the market will worry we're headed for another recession.

Economic and Event Calendar

- Monday, April 01 -
ISM index for March

- Tuesday, April 02 -
Factory Orders for February
auto & truck sales for March
Eurozone manufacturing PMI
Eurozone unemployment
China's non-manufacturing PMI

- Wednesday, April 03 -
ADP employment change report

- Thursday, April 04 -
Weekly Initial Jobless Claims
Bank of England's interest rate decision
European Central Bank (ECB) interest rate decision
ECB President Draghi press conference
Bank of Japan interest rate decision
Eurozone Services PMI

- Friday, April 05 -
Nonfarm payrolls (jobs) report for March
Unemployment rate
Eurozone retail sales

Additional Events to be aware of:

April 10th - FOMC minutes
April 19th - April option expiration
May 1st - FOMC meeting
May 18th - U.S. debt ceiling deadline

The Week Ahead:

Looking ahead the wall of worry for the bulls to climb continues to grow. Europe is in trouble. Much of the Eurozone is already in recession and the recession seems to be getting worse in Italy and France. The radioactive fallout from EU regulators using the nuclear option to seize depositors money in Cyprus will be a deadly plague for the region. The already struggling southern hemisphere of Europe will suffer a capital flight out of the region, which will only further weaken the already struggling banks. Consumer spending, which is already on the decline will likely worsen as consumers turn defensive. This will make the current recession worse. Since Europe is China's biggest buyer of goods a growing slowdown in Europe means a slowdown for China. The U.S. is already hovering at no growth (+0.4%). How will the U.S. grow if Europe and China start to sink again?

The U.S. markets will quickly turn their focus to Q1 earnings season. Dow-component Alcoa (AA) kicks off the season on April 8th. Yet earnings season won't really pick up until the following week. Last week I warned you that analysts current estimates for Q1 earnings growth is a very anemic +0.58%. That's almost negative. We've already seen a wave of negative earnings warnings. According to FactSet Research Q1 2013 is shaping up to have the highest level of negative earnings guidance since they began keeping track of this data back in 2006. Now Q1 earnings season could go one of two ways. Wall Street analysts may have set the bar so low that corporate America will be able to meet or exceed expectations. On the other hand analysts have not have adjusted their expectations low enough and the current parade of earnings warnings might be foreshadowing a season of disappointments. With the market at all-time highs and up significantly for the year already, the temptation for investors to sell and lock in gains will be too much and the sell-off could be sharp.

Another issue facing the U.S. market is the seasonal trend to "sell in May". April 30th marks the end of the best six months in the stock market. The market is also technically overbought. The S&P 500 and NASDAQ are both up five months in a row. The number of S&P 500 components above their simple 200-dma is 89.8%. Usually when this reading gets too high traders use it as a contrarian sell signal suggesting the market is overbought and due for a correction. Depending on your trading style that might be above 65%, above 80% or above 90%. The problem is at 89.8% it can't get much higher.

Another issue is investor sentiment. The Investor Intelligence bearish percent levels has fallen below 20%. This suggest investor complacency and is another contrarian sell signal that too many investors are bullish. There seem to be a number of warning signs that the market is in danger territory. Yet we all know that stocks can remain at unreasonable levels a lot longer than anyone anticipates. If everyone is expecting a correction the correct tends to get postponed.

My comments from last week remain true today. Can the market hit new highs from here? Absolutely. Could Q1 earnings season be a crucial turning point for the market? Absolutely. While my bias is for a market correction in the next two to four weeks there is no guarantee it's going to show up. We can only trade what the market provides and right now the trend is up. However, you do have a choice when and how you apply your money to the market. Sometimes the best trade is no trade. If you feel compelled to trade then consider limiting your position size to reduce your risk and tighten your stop losses.

James