Buying the stock market dip remains in vogue as equities race back toward their April highs. Stocks were not alone as both commodities and bonds rallied as well. The rally in stocks poses an interesting question. Who is really buying equities? This past week saw investors pulling significant amounts of money out of U.S. stock funds. At the same time it was disclosed that many of the world's central banks are now buying equities as part of their QE programs. It was the last full week of April and end of month window dressing could have boosted the rebound. The big cap S&P 500 index added +1.7% for the week.

The semiconductor sector was a bright spot in the market with a +4.39% weekly gain. Chips got a boost after news surfaced that demand for certain memory chips is outpacing supply. Speaking of overwhelming demand, gold was a hot commodity last week. Both silver and gold were crushed two weeks ago with their worst slide in years. Yet demand for physical gold surged as investors rushed to buy the precious metal at these new lower prices. Bloomberg ran a story saying that demand for gold was so high that the U.S. Mint had to halt sales of its smallest gold coin (one-tenth ounce) because buyer demand more than doubled following the sell-off and the Mint simply ran out of inventory. For the week gold bounced +3.9% and silver added +3.1%.

Homebuilders were another hot industry with the homebuilding index up +8.9%. Inventories are falling. The latest data showed inventory at a 4.7 month supply. Equilibrium is supposed to be a 6.0 month supply. The pace of existing home sales fell -0.6% to an annual pace of 4.92 million in March. Yet new home sales rose +1.7%. DR Horton (DHI) delivered a bullish earnings report with a very positive outlook and the stock soared, helping fuel industry gains. Several homebuilders were also upgraded this past week, which didn't hurt.

The University of Michigan Consumer Sentiment index came out with its final reading for April, which bounced from 72.3 to 76.4. This is a drop from March's reading of 78.6 and represents a three-month low.

The big economic report for the week was the first estimate on U.S. Q1 GDP growth. Analysts were expecting +3.0% growth. Unfortunately, the reading came in at +2.5%. This was improvement from the 2012 Q4 growth rate of +0.4% but economists are worried that the Q1 bounce is temporary. Most of the Q1 growth came from businesses rebuilding their inventories and a rise in consumer spending at the expense of consumer savings. The savings rate for Americans fell from 4.7% in the fourth quarter to 2.6% in the first. A real drag on the economy was a drop in government spending, which fell -4.1% following a -7.1% pullback in Q4 2012. Government spending is expected to plunge even further as the sequestration cuts kick in. We are starting to see some analysts already downgrade their Q1 and Q2 growth numbers with expectations for a Q1 revision to less than +2% growth and Q2 estimates falling to +1.5% growth.

There were plenty of headlines from overseas. The European economy continues to slow down. The Eurozone manufacturing PMI fell to 46.5 and the services PMI dropped to 46.6. Germany, the Eurozone's biggest economy, saw its manufacturing PMI fall from 49.0 to 47.9. German services PMI declined from 50.9 to 49.2 PMI readings that come in at less than 50.0 indicate economic contraction.

Spain is the fourth largest economy in the Eurozone. Unfortunately Spain's economy is in shambles. The Spanish government confessed that the situation is worse than expected and they will not hit the EU's growth targets or deficit reduction targets that Spain agreed to for its bailout. The country's employment is surging and hit 27.1%. If you're less than 24 years old the unemployment rate is 57% in Spain. The country adjusted its 2013 GDP growth estimates from -0.5% to -1.3%. Spain also adjusted its deficit estimates and expected a 2013 deficit of 6.3% versus the EU's target of 4.5%. Spain also raised its deficit estimates for years 2014 and 2015.

China remains a significant concern for the market. Two weeks ago the market sank on weaker than expected Chinese economic data. The data continues to trend lower with disappointing PMI and flash manufacturing PMI readings at or below the 50.0 mark. There is also a growing concern over Chinese banks and consumer debt. Non-performing loans at Chinese banks surged +20% year over year in March. Meanwhile consumer credit in China is ballooning with an increase of more than $1 trillion in just the first quarter. That is significant when you consider the entire Chinese economy is only $8 trillion (nominal GDP). I will point out that I had a hard time confirming this story. That $1 trillion rise could be a jump in Chinese government debt across all levels of the government. Whether it's government or consumer, it is a significant increase. While we're on the subject of China it's worth noting that the recent down turn in economic growth is prompting some analyst firms to downgrade their forecasts. JP Morgan and Goldman Sachs have already lowered their estimates for China's 2013 growth.

Believe it or not but we're still in Q1 earnings season but we are past the peak. The market just suffered through one of the busiest weeks of earnings announcement and there were several warnings. Big companies like Amazon.com (AMZN), Apple Inc. (AAPL), Caterpillar (CAT) and Starbucks (SBUX) are lowering their guidance. Only 59% of the companies that have reported have beaten Wall Street's estimates. That's the lowest rate of success in the last four years.

The bigger problem is falling revenues. Depending on who you listen to the only 35% to 44% of the companies reporting have beaten the revenue estimates. That means corporations are meeting the earnings estimates by cost savings not new business. Normally 62% of companies beat the revenue estimates. One issue making the earnings outlook even darker is guidance. The number of companies that are lowering guidance versus raising guidance has hit a ratio of 14:1. Normally this ratio is closer to 2:1. Falling revenue and earnings guidance is not a bullish market environment for rising stock prices. 2013 could be more challenging than we previously expected.

Major Indices:

After breaking the rising trend line of higher lows and testing its simple 50-dma the S&P 500 index bounced. It was a pretty good bounce too with the index surging past all of its short-term moving averages and approaching its brand new all-time high set earlier this month. Unfortunately it looks like the rally is losing steam. The closing high on April 11th was 1593. The intraday high on Thursday was essentially 1593.

There is a risk that the S&P 500 reverses from here or it continues to push higher and tags round-number resistance at 1600 and then reverses lower. This would look like a bearish double top pattern. Of course nothing is guaranteed. If the S&P 500 breaks out past 1600 the next level of resistance is probably 1620. On the other hand if the index does reversed we'll probably see it testing support near 1540 pretty quickly. If the 1540 area fails then I would look for a drop toward 1500.

chart of the S&P 500 index:

The NASDAQ was a strong performer last week with a +2.2% gain. The index surged back toward resistance near the 3300 level. The NASDAQ also faces a potential reversal at resistance. A failure here, near 3300, would look like a short-term bearish double top. A breakout could spark some short covering and we could see the NASDAQ racing to 3350 or 3400. On the other hand a reversal would probably see a drop toward the 3100 area or worse.

Daily chart of the NASDAQ Composite index:

The rebound in the small cap Russell 2000 index was impressive with a +2.49% gain. It could have been a combination of dip buyers and short covering from round-number support at the 900 level. Yet so far the rebound has failed to hit new relative highs.

If you're the optimistic type you might be able to interpret the $RUT's action over the past few weeks as part of a bull-flag pattern that's still developing. I suspect that the $RUT will reverse and we'll see it testing the 870-850 area. If the $RUT surprises us with an upside breakout then the next significant resistance area is probably the 1,000 mark.

chart of the Russell 2000 index

Economic Data & Event Calendar

We have a very busy calendar for the coming week. The end of April and the beginning of March brings several key economic reports. We'll hear from both the Federal Reserve, which has a two-day meeting, and the European Central Bank. No one expects any changes from the Fed. Yet there seems to be a growing consensus that the ECB might lower interest rates. After the ECB interest rate decision the ECB President, Mr. Draghi, will hold a press conference.

This week will also bring the next jobs report. The latest initial jobless claims fell to 339,000. That's better than expected and could prove positive for the jobs number. Analysts expect the ADP report on Wednesday to show +170,000 new jobs. While the U.S. government's nonfarm payrolls report is only expected to hit +150,000 but that would be improvement over the prior month's +88,000 reading. Odds are high that March's +88K jobs number will be revised but which direction will it go? Let's not forget that April will be influenced by the sequestration budget cuts. Government jobs should see a significant decline.

Economic and Event Calendar

- Monday, April 29 -
Personal income & spending
Pending Home Sales

- Tuesday, April 30 -
FOMC meeting begins
Case-Shiller 20-city home price index
Chicago PMI for April
Consumer Confidence for April
Eurozone unemployment rate
Chinese manufacturing PMI

- Wednesday, May 01 -
FOMC meeting ends, interest rate decision
ADP Employment Change report
ISM index for April

- Thursday, May 02 -
Weekly Initial Jobless Claims
Auto & Truck Sales
Eurozone manufacturing PMI
ECB interest rate decision
ECB President press conference

- Friday, May 03 -
U.S. nonfarm payrolls (jobs) report
Unemployment rate
ISM services
Eurozone PPI

Additional Events to be aware of:

May 18th - U.S. debt ceiling deadline
May 27th - U.S. market closed for Memorial day

The Week Ahead:

I have been warning readers that the declining economic data is pointing toward a slowdown and should spark a correction in the equity markets. I've been suggesting that we'll see a market top in the mid-April to early May time frame. So far the correction hasn't shown up yet but we still have a couple of weeks to go.

What investors should find concerning is the deteriorating market internals. The U.S. market's major indices are near their recent highs and yet the number of new 52-week highs is falling. At the same time U.S. stock funds are reporting significant outflows. Where is that money going? It could be commodities, which bounced significantly. It could also be into the safety of bonds. The yield on the 10-year U.S. bond has plunged over the last several weeks. Bond yields fall as the bond market rallies. Normally if investors are bullish on stocks they're not buying bonds and yields should be rising. Yet we have the opposite occurring.

chart of the U.S. 10-year bond yield

Another warning signal is the surge in margin debt. Individual investors and hedge funds can use margin to leverage their equity investments. Right now margin levels are soaring and they are close to breaking out past the 2007 highs. Do I need to remind you that the U.S. stock market peaked in 2007? This bubble in margin debt could be a contrarian signal that we're near a top for equities.

Yet another issue facing the stock market is the recent trend for the U.S. economy to stumble in the second quarter. Three years in a row the U.S. economy has surged in the first quarter only to hit the brakes in the second quarter. 2013 marks the fourth year in a row we've seen a rising Q1 economy (+2.5% versus +0.4% Q4 2012). Yet all signs are pointing to a another slowdown ahead.

We also have a number of geopolitical hotspots right now. The situation with North Korea hasn't improved. South and North Korea operate a jointly run factory just across the border in North Korea. It's called the Kaesong industrial complex. The North shut down the factory complex a month ago as part of its saber rattling. Two days ago the South decided to bring home all of its workers. Once this separation is complete it will heighten tensions between the two countries.

There are also new developments in the Syria civil war. The U.S. has tried to stay out of it but warned that if Bashar Al-Assad's regime used chemical weapons on their people we would get involved. Right now there are conflicting reports whether or not Assad used chemical weapons. There are plenty of rumors and conspiracy theories out there over who did what and why. The point here is that if the U.S. military does get involved it's going to escalate the situation since Russia has consistently supported the Assad government.

Let's not forget that we are probably just a few months away from another showdown between Israel and Iran regarding Iran's nuclear weapons program. That could be the military event of the summer.

Overall the slowing economic growth data from China, Europe and the U.S. is the major concern. The large number of corporations that are lowering their earnings guidance merely confirms there is trouble ahead. The market is way overdue for a real correction of -5% to -10%. Remember, corrections are healthy and a normal part of the market cycle. The challenge is trying to identify what might spark the correction. The spark could be the FOMC meeting this week. It could be the ECB President's press conference if Draghi says something unpalatable. It could be the jobs report on Friday. We really will not know until after the fact.

I read an interesting trading maxim this week. "It's okay to be wrong; it is not okay to stay wrong." Essentially the market is always right. If we are wrong with a trade or a market bias, then admit we are wrong, learn from it and move on. If we reach mid-May and the U.S. market hasn't peaked yet I may have to admit that I'm wrong in forecasting a top.

James