It was no surprise to see some profit taking the first week of April. After a stellar Q1 performance the market was overbought and due for a pullback. I cautioned investors that stocks could see some window undressing after the prior week's quarter end window dressing. Traders had plenty of excuses to do some profit taking because the trend of economic data has definitely taken a turn for the worse. While the first quarter witnessed a significant inflow of money into stocks the money flow turned defensive this past week. Safe haven sectors like utilities and bonds were the big winners.

The economic data flow in the U.S. had its normal new month reports. Vehicle sales in March hit an annual pace of 15.22 million. While that was slightly less than expected it's still a healthy pace. Ford had a good month with U.S. sales up +6% versus estimates of just +3.8%. The U.S. national ISM data was a disappointment with the March reading coming in at 51.3 compared to estimates of 54.0. This was the lowest ISM reading since December and illustrates how the economy is slowing down. Readings below 50.0 indicate recession and contraction. For the moment the ISM is still positive but it's moving the wrong way.

The big report for the week was the U.S. nonfarm payroll report (jobs report). The weekly initial jobless claims have been trending higher. The most recent week showed initial claims up to 385,000, which is the highest level in months. That should have been a warning that the jobs data would disappoint. Economists were expecting March to show +190,000 to +200,000 new job growth. Unfortunately the report came in at +88,000, obviously a significant miss. Add that to what is becoming a trend of disappointing economic reports and investors have reason to worry about the economy.

Another issue is the unemployment rate. The unemployment rate fell to 7.6%. How can the unemployment rate fall if we are not adding jobs? Easy, just reduce the number of workers in the workforce. March saw almost 500,000 people drop out of the workforce. They have given up looking for a job. We only have 314 million people in the U.S. About 143.2 million of them have a job. The labor force participation rate has plummeted over the last few years and fell to 63.3% in March. That's the lowest level since 1979. If that wasn't bad enough news the household survey unveiled that the country lost -206,000 jobs.

There were plenty of headlines overseas. One of the biggest stories was a new QE program in Japan. It was widely expected that the new Governor of the Bank of Japan was going to increase monetary easing. Yet the market was surprised by just how much QE the central bank will do. The BoJ plans to generate $1.4 trillion worth of money into the economy (about 270 trillion yen). They plan to do it within the next two years to try and shock the country out of a 20-year span of deflation and stagnant growth. The BoJ's target is a +2% inflation rate. Essentially the BoJ will be buying $75 billion a month in bonds and securities for the next two years. The U.S. is spending $85 billion a month in its QE program but the U.S. is three times larger than Japan. There are serious concerns that Japan's efforts could spark a global currency war as other nations devalue their currencies to remain competitive.

Meanwhile in Europe the region continues to slide deeper into recession. The Eurozone has been in recession since the third quarter of 2011 and it's not getting any better. Eurozone retail sales fell -0.3% month over month. Eurozone unemployment hit an all-time high of 12% and it's significantly worse for young people in Europe. The Eurozone manufacturing PMI came in at 46.8. That was actually slightly ahead of expectations but still below the 50.0 mark. Readings under 50.0 indicate contraction and recession. France, Germany, Italy, Spain, and the U.K. all reported PMI's below 50.0. Investors are looking for safety and they're putting their money into German bonds. Yields on German 10-year bunds fell to their lowest level of 2013 and they are quickly approaching the all-time low of 1.13% hit last summer.

The beleaguered country of Cyprus had some good news with an improvement in its recent capital controls and the EU granting the country and extension to 2018 to meet its fiscal targets. Yet the threat remains that other countries could use the Cypress model to steal from bank depositors to bailout the banking system. Italy could be the next one on the list. The CEO of Italy's largest bank, Unicredit, just warned people that he thinks the "levy" on bank deposits is an acceptable "model" for future emergencies. Italians are already moving money out of the country to protect their assets.

As if Europe didn't have enough to worry about Greece could be back in the headlines. There is speculation that the troika might delay the next installment of bailout aid to Greece because regulators are unhappy with Greece's progress (or lack thereof) on making any significant reforms.

Major Indices:

The S&P 500 index pared its losses to just -1.0% for the week. The disappointing jobs data sparked a new round of weakness on Friday morning. Yet traders bought the dip near support. The trend of higher lows remains intact for now. I told readers last week to watch for support near 1540.

I would not be surprised to see the S&P 500 bounce back toward its recent highs near 1570-1575 before rolling over again. Of course that is my bearish bias talking. I do expect a deeper correction but I could be wrong and we could see the S&P 500 burst through its 2013 high and hit new all-time, historic highs above 1576 instead.

Just in case we do not see a breakout to new highs the levels to watch for support are 1540 and probably the 1500 level. A typical -5% to -10% correction from 1570 would be a pullback into the 1491-1413 region.

chart of the S&P 500 index:

The NASDAQ composite gave up -1.95% for the week. It would have been worse but the index rallied off its Friday morning lows and just barely closed back above technical support at its 50-dma and the 3200 level. I really don't expect this bounce to continue but if it does the 3270 level is overhead resistance. On the other hand if the NASDAQ does correct then we can watch for potential support near 3100 and the 3000 area.

Daily chart of the NASDAQ Composite index:

Weekly chart of the NASDAQ Composite index:

The small cap Russell 2000 index suffered a -2.9% drop. The $RUT pierced short-term support near 940, 920 and its 50-dma. You might consider it short-term oversold but it is still longer-term overbought from its November-March rally. My worry here is that the $RUT will likely bounce from current levels only to fail near 940 and then resume the down trend in earnest.

If fund managers are selling the small caps it could mean they've lost faith in the rally. The first pullback in December found support at the 20-dma. The second pullback in February found support at the 40-dma. Now the RUT has broken through its 50-dma. Each pullback is getting deeper. If the $RUT does see a correction a -10% pullback from the 950 level would be a decline towards 855. The old all-time highs near 865-870 might offer some support.

chart of the Russell 2000 index

Economic Data & Event Calendar

The pace of economic data slows down a bit this week. Reports to watch are the EU industrial production, U.S. PPI, University of Michigan Consumer Sentiment. Plus the FOMC minutes from the last meeting could move stocks. This week also heralds the beginning of Q1 earnings season. Dow-component Alcoa (AA) starts on April 8th. Big banks JPM and WFC will report on April 12th. Earnings season starts off slow but will pick up speed next week.

Economic and Event Calendar

- Monday, April 08 -
Alcoa (AA) kicks off Q1 earnings season
German industrial production
Chinese inflation data

- Tuesday, April 09 -
wholesale inventory data

- Wednesday, April 10 -
FOMC minutes
Eurozone industrial production

- Thursday, April 11 -
Weekly Initial Jobless Claims
Italian 10-year bond auction

- Friday, April 12 -
U.S. Retail sales data for March
Producer Price Index (PPI)
University of Michigan Consumer Sentiment
EU finance minister meeting

Additional Events to be aware of:

April 19th - April option expiration
April 26th - Q1 GDP estimate
May 1st - FOMC meeting
May 18th - U.S. debt ceiling deadline

The Week Ahead:

What can I say about the week ahead of us? It would be nice if all we had to worry about were earnings announcements. Unfortunately the saber rattling from North Korea is getting worse. The isolated nuclear power has issued an April 10th deadline for diplomats to leave the area for their own safety. The fear here is that this young North Korean leader might feel compelled to shoot at somebody to save face. Hopefully cooler heads prevail. Any aggressive action by North Korea would be a suicidal move, especially with its only potential friend China starting to lose patience. That doesn't mean an attack by North Korea wouldn't have consequences for the rest of us. Fortunately most of the experts on the region do not believe conflict is imminent in spite of the threats. What the stock market should be worried about is the economic slowdown. Manufacturing PMIs around the major economic players are moving the wrong direction. Europe is struggling as citizens lose faith in the banking system and move money to safety after the Cyprus incident. That's going to make the current recession in Europe even worse. Eurozone employment is hitting all-time highs. Consumers have no job and no faith in their banks or governments.

The U.S. is slowing down thanks to an uncertain climate for businesses and the sequestration cuts that will pick up speed in April. Analysts expect the sequester to cut about 1% from the U.S. GDP and eliminate between 700,000 to 1.5 million jobs. Since the U.S. was already slowing down the sequestration almost guarantees we will fall back into recession. The U.S. and Europe are China's biggest customers. If the former are slowing down the China will slow down as well.

Since Q1 earnings season is about to start we'll hear from corporate America on their forecasts for Q2 and the rest of 2013. Guidance for the rest of the year could shape market direction. Given all the uncertainties in U.S. government spending and the slowdown in Europe many of the big multi-national American companies are likely to issue cautious guidance.

I'm going to say it again. The S&P 500's trend is still up for now but odds are Q1 earnings season will be a perfect excuse for investors to sell stocks and lock in gains, especially for anyone who subscribes to the seasonal sell-in-May theory of investing. I could be wrong but I'd rather sit on the sidelines and watch for the next two or three weeks than buy at current levels. Stock market corrections are normal. We can just wait for the next correction and have a much better entry point -5% to -10% lower from current levels. As LEAP option investors we need to be patient. That means we also need to be patient when it comes to our entry point as well.

James