We are halfway through the month of April and the stock market rally has resumed. Traders bought the dip. Now the S&P 500 index and the Dow Jones Industrial Average are both hitting new all-time highs. Financials, transports, and small caps all participated but the transports and the Russell 2000 index have failed to breakout past recent resistance.

Meanwhile money continues to flood into safe haven investments like U.S. bonds with yields on a 10-year note down to 1.72%. Worries over the economy and the shadow of deflation have crushed commodities. Oil is down two weeks in a row. Gold and silver were both hammered last week with silver falling to multi-month lows and gold plunging to a new 52-week low.

The flow of economic data continues to show weakness. The U.S. retail sales data for March was a disappointment. Actually all of 2013 is not shaping up very well. The government revised retail sales for January from +0.2% to -0.1%. February's was revised from +1.1% to +1.0%. March came in negative at -0.4%. It was the worst drop in eight months. Many are blaming the weather with an uncommonly cold March for much of the country. It could have been worse but a six-week slide in gasoline prices is helping the consumer. I'm worried about April since it will be the first month to really begin to feel the affect of the sequestration cuts.

April's consumer sentiment reading was another disappointment. Economists were expecting a drop toward 78.0. The headline number retreated from 78.6 to 72.3. This is the lowest reading in over six months. In positive news the weekly initial jobless claims fell from 388,000 to 346,000 although this number will likely be revised as the government tries to adjust for Easter. Meanwhile the wholesale look at inflation in the U.S. with the Producer Price Index (PPI) came in at -0.6% in March. Economists were expecting -0.2%.

It is interesting to see so much strength in the U.S. market considering the weakness around the world. Unemployment is ticking higher from Europe to Australia. France unveiled some troubling figures last week with the country's trade deficit hitting 6.0 billion euros and a budget deficit of 27.1 billion euros. Economists were only expecting a trade deficit of 5.0 billion and a budget deficit of 20.0 billion euros.

Portugal could be fighting for the spotlight soon. In legal news the European Union's austerity demands forced on to Portugal have been declared unconstitutional by a Portuguese court. Meanwhile former Portuguese Prime Minister Mario Soares confessed that Portugal cannot pay its debts. He is suggesting the country choose an Argentine-style default.

Another small European country that is struggling with its own economic crisis is Slovenia. Many are concerned that Slovenia could be facing a Cyprus-like banking crisis. Speaking of Cyprus it was discovered in a leaked Debt Sustainability Report that the Troika expects Cyprus to cough up another 6 billion euros for their own bailout, or what has become known as a "bail in". Since we're on the topic of "bail ins" the EU finance ministers are considering a new proposal to levy/tax/steal from money markets and interbank deposits for troubled banks. As if the bank robbery in Cyprus didn't do enough damage to depositors' faith in the banking system now they're considering another "levy"? This will surely inspire citizens to put more of their money in the bank.

Looking at Asia it was a good week for Japan. The Japanese NIKKEI continues to soar following news of the Bank of Japan's record-breaking monetary easing announced two weeks ago. The NIKKEI index is marching toward new five-year highs. The week wasn't so great for China. While the Chinese markets held up reasonably well the economic data was disappointing. Exports to the U.S. and Europe fell for the first time in four months. Surprisingly China actually had a trade deficit of $880 million in March. Compare that to economists estimates for a trade surplus of $15.4 billion for the month. What does that tell you about slowing exports? While there has been some positive growth in domestic consumption the Chinese customs office confessed that they do not see "a stable recovery in external demand". Chinese customs officials had a rough week when they had to back track from earlier comments that China's export numbers might be falsely inflated to look better than they really are. Again, yet another warning flag that China may be slowing down a lot more than they're letting on.

Major Indices:

The rally in the S&P 500 index continued with a +2.29% gain last week. The index broke out past its 2007 highs to hit new all-time highs. For the year the S&P 500 is up +11.4%. On the daily chart below you can see the S&P 500 is rising in a bullish channel but now it faces potential round-number resistance at the 1600 level.

The future of this rally should depend on corporate earnings. Earnings season hits full speed this week. If somehow the rally continues then the next level of resistance, past 1600, is probably 1620 and 1640. On the other hand if stocks pullback then the S&P 500 index should have support near its 30-dma (currently near 1560) and then the 1550-1540 zone. A close below its simple 40-dma (currently 1545) might be seen as a signal that the up trend is broken.

One potential outcome is a sideways consolidation for the next week or two with traders buying the dips near the bottom of the bullish channel.

chart of the S&P 500 index:

The NASDAQ composite has rallied to new multi-year highs with a dramatic rebound off last Friday's lows. The breakout past resistance 3270 pushed the NASDAQ to multi-year highs. You can already see how broken resistance is acting as new support with Friday's intraday bounce at 3271. Coincidentally this also matched up with a dip toward the prior trend line of resistance.

The NASDAQ gained +2.8% for the week and is up +9.1% year to date. If this rally continues then the next likely resistance level is 3350. On the other hand if the NASDAQ reverses then look for support near 3200 and 3100.

Daily chart of the NASDAQ Composite index:

The small caps look weaker than the big caps and that could be a caution signal. Money managers favor big caps for their liquidity when they're worried about the market. The bounce in the small cap Russell 2000 index ($RUT) produced a +2.1% gain last week. Yet the $RUT failed at prior resistance. Until we see the $RUT deliver a convincing close above the 955 level then this bounce may end up producing a new lower high and could be warning for future weakness.

If the market can keep this rally alive then the $RUT might see potential resistance near 980 and definitely at the 1,000 mark. If the market reverses lower then we can look for potential support near the 900 level and the old all-time highs near 870.

chart of the Russell 2000 index

Economic Data & Event Calendar

The flow of economic data slows down a bit this week. On Sunday, April 14th, the Chinese government will release their latest readings on GDP growth, industrial production, and retail sales. Any disappointments could influence the market on Monday morning. The big event for the week could be in North Korea. Monday, April 15th, is Kim Il-sung's birthday. He was the founder of the current North Korean government and he would have been 100 years old on Monday. Many are expecting North Korea to do a missile test on Monday as part of a national celebration for their country's founder. Unfortunately tensions in the region are high and any missile launch could make matters worse.

As far as economic data goes the Federal Reserve will release their Beige Book on Wednesday. The Philly Fed manufacturing survey comes out on Thursday. Q1 earnings season announcements will likely overshadow any economic news. We're going to hear from several high-profile technology names this week. A few to look for are: Ebay (EBAY), Google (GOOG), IBM, Intel (INTC), Microsoft (MSFT), SanDisk (SNDK), and Yahoo (YHOO).

Economic and Event Calendar

- Monday, April 15 -
New York Empire State manufacturing survey
N. Korean missile launch?
Eurozone industrial production

- Tuesday, April 16 -
Consumer Price Index (CPI)
Housing Starts and Building Permits
Eurozone inflation data

- Wednesday, April 17 -
Federal Reserve's Beige Book for April

- Thursday, April 18 -
Weekly Initial Jobless Claims
Philadelphia Fed survey

- Friday, April 19 -
April option expiration

Additional Events to be aware of:

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

The Week Ahead:

I was pondering what to title tonight's market commentary and the first thing that popped into my head was "Stairway to Heaven". Yes, I am referring to Led Zeppelin's 1971 hit of the same name. The main line of the song is "and she's buying a stairway to Heaven". I feel like the "she" in that sentence is the U.S. Federal Reserve.

This past week several fed governors assured the market that they would not turn off or even reduce their QE programs for the foreseeable future. Most of the fed governors would like to see six months of positive economic growth and job growth before they consider reducing their QE purchases. Given the current state of the economy and lack of jobs in the U.S. we are pretty much guaranteed that the FOMC will not change their stance on monetary easing throughout the rest of 2013.

The latest jobs report was a big miss at just +88,000 jobs and the Q4 GDP growth was almost negative at +0.4%. That was down from +3.1% in Q3 2012. Right now estimates for the first quarter of 2013 are all over the place from +1.4% to +3.5%. We could see those numbers retreat. Goldman Sachs, with one of the more optimistic forecasts, just lowered their Q1 estimate down to +3.2%. The government's first Q1 estimate comes out on April 26th.

The IMF is also lowering their U.S. growth estimates. A leaked draft found its way to Bloomberg who reported that the IMF is concerned with weak consumer sentiment, slowing consumer spending, and the U.S. budget deficits. The report showed that the IMF would lower their 2013 growth forecasts from +2% down to +1.7% for the whole year. Honestly, I am surprised the estimate isn't lower. Has the market forgotten that Obama's new tax increase from January and the sequestration budget cuts are going to cut GDP growth by up to -1.75%. The sequestration cuts are expected to generate 700,000 to 1.5 million job losses this year.

It seems like market participants don't care because the Fed is pumping a record-setting amount of money and one of their goals is rising asset prices. Yet Q1 earnings results and guidance could alter investor opinions. The next few weeks could be very important for the market and investor sentiment as we hear from hundreds of corporations. If businesses are too cautious or issue earnings warnings it could be tough for market bulls to keep the rally alive. Fortunately, Wall Street has lowered earnings expectations so low that it's going to be hard to miss.

What would you think if I had previously warned you that 80% of the S&P 500 companies to issue earnings guidance would warn and guided their Q1 estimates lower? Would you expect the S&P 500 index to be hitting new all-time, record highs in this sort of environment? That's exactly where we are today. On a positive note analyst estimates for Q1 earnings season have risen from +0.4% earnings growth a week ago to +1.0% growth today. We face the real risk that a slowing Europe, slowing China, slowing U.S. and the sequestration cuts will weigh significantly on corporate America's guidance.

Longer-term investors should be seriously concerned with the financially deadly morass that is currently Europe. Suddenly there is this new concept that anyone with more than $100,000 in the bank is rich. Or in Europe's case, anyone with more than 100,000 euros. The concept of taxing the rich has seen a serious adjustment over the last five years from those making one million dollars a year, to $400K a year, to $250K a year, and now it's down to anyone with more than $100K in the bank.

The EU government's bank robbery in Cyprus from anyone with more than 100K euros in the bank has become the new "template", especially in Europe. Now Australia just launched news rules to tax retirement accounts. Without getting bogged down in the details essentially, Australians were previously taxed putting money into their retirement accounts. Now they will also be taxed again as they draw money out of their retirement accounts, if you have more than $100K.

In summary Europe is a mess and it's getting worse. Cyprus, Greece, Spain, Portugal, Italy, and now it appears Slovenia are all in serious trouble. U.K. is printing money (buying debt) to pump up their economy. France's economy is in recession. Germany is slowing down. Japan is trying to shock their economy out of deflation with a mind-blowing amount of monetary easing that many claim could spark a currency war. China is lying to us about the health of their exports and they don't see any external demand. The U.S. has seen a parade of slowing economic data and faltering labor market while our government spending is out of control. Yet the U.S. equity market is hitting new all-time highs. Yes, the Federal Reserve definitely seems to be "buying a stairway to Heaven".

Last week my expectations for the market were for stocks to see a top in the middle to latter half of April, maybe early May. Then the market would reverse lower and experience a normal, healthy correction that we could use as a new entry point to launch bullish positions. Following what might be a volatile summer I expected stocks to resume their up trend and close the year at new highs. However, now I'm not so bullish for 2013 year end.

Geopolitical risks seem to be growing. I pray that all of the saber rattling in N. Korea is nothing more than a charade. Maybe it's all a build up for a new round of negotiations with the U.S. and the west or maybe it is a way for the young N. Korean leader to solidify his power within his own country. I really don't know I just hope no one "accidentally" sparks a new Korean war. The world will also face a likely showdown between Israel and Iran later this summer, which will probably drive oil prices higher.

If the world is lucky enough to avoid any new major military conflicts in 2013 we still have to deal with a slowing global economy. A slow down that will be made worse by the self-inflicted wound that is the U.S. sequestration budget cuts. If the U.S. somehow manages to avoid a recession it will still be a year of very slow growth.

I did not intend for this market commentary to be so gloomy. If you're the optimistic type then I've just laid out what could be a massive wall of worry for the bull market to climb. I find the surge of money into U.S. treasuries over the last five weeks to be a potential warning signal but maybe that is just foreign money looking for a safe haven after what happened in Cyprus. Here's a bit to cheer you up. Goldman Sachs just unveiled their long-term forecast where they expect the S&P 500 to hit 1,900 by the end of 2015. That's a +18% rally from current levels over the next two and a half years.

James