"Don't fight the Fed!" has been the battle cry of the bulls and so far bears remain thoroughly intimidated. The U.S. market has continued to rally and this past week saw the Dow Jones Industrial Average cross 15,000 for the first time in history. The S&P 500 index broke out past resistance at the 1,600 mark to close at all-time, historic highs. Gains were widespread with technology leading the charge higher. The trend of disappointing economic data continues but the Friday morning jobs report was a significant exception. Most were expecting a disappointing jobs number and the better than expected nonfarm payroll surprise sparked a short squeeze on Friday morning, launching stocks past resistance. The U.S. bond market reversed sharply on the jobs news and the 10-year yield surged to 1.75% on Friday.

It was a big week for central banks news with both the Fed and the ECB meeting. The U.S. Federal Reserve held a two-day meeting that concluded on Wednesday, May 1st. Ben Bernanke and crew left rates unchanged in the 0.0% to 0.25% zone. However, the Fed's statement did say they were prepared to increase or decrease QE as needed. Currently the Fed is purchasing $85 billion a month in its quantitative easing program. The fact that they're willing to increase these purchases should tell you just how weak the economy really is. Yet the sudden improvement in the jobs picture will generate concerns that the Fed may reduce purchases sooner than expected.

Economic data for the U.S. was mixed. The Chicago PMI report fell to 49.0 versus estimates for 52.5. Numbers below 50.0 indicate economic contraction. The U.S. ISM index slipped from 51.3 to 50.7. The ISM nonmanufacturing (a.k.a. services) index dipped from 54.4 to 53.1 in April. These reports suggest the economy is still slowing down. Yet we did see good news out of the real estate market and the jobs picture.

Pending U.S. home sales surged +1.5%, above estimates for +1.0%. The Case-Shiller 20-city home price index jumped +9.3% year over year. Home prices have risen to their highest levels since December 2008. Yet home ownership has fallen to levels not seen since 1995.

The ADP Employment change report came in at a disappointing +118,900 new jobs when economists were expecting +178K. This drop in the ADP number weighed on analyst estimates for the nonfarm payroll report and consensus estimates fell from +150K to +125K for April. Yet the weekly initial jobless claims numbers were actually improving. The latest initial jobless claims came in at -18,000 to 324,000. That's a four-year low.

There were plenty of traders that had positioned themselves for a miss in Friday's jobs report. March's report was a disaster and April was expected to be impacted by the government's sequestration cuts. On Friday morning when the government said April nonfarm payrolls came in at +165,000 new jobs it sparked a massive short squeeze in stocks and a sell-off in the bond market. March's jobs number was revised from +88K to +138K and February was revised from +279K to +332K. Thus April's better than expected jobs growth and the upside revisions for February and March has suddenly created a much stronger picture for the U.S.

The unemployment rate improved from 7.6% to 7.5%. Unfortunately the U.S. labor participation rate remains at 34-year lows at 63.3%. Another concern was the hours worked component. The average workweek contracted from 34.6 to 34.4 hours. Normally falling hours works is bearish for job growth. We want to see hours worked rising, which tends to lead to stronger hiring trends.

While we're on the topic of unemployment the EU's unemployment hit a record high of 12.1%. For struggling countries like Spain and Greece it is more than double that. The European region continues to struggle with growth. The EU manufacturing index fell to 46.7. Numbers under 50.0 indicate contraction. Germany is the EU's largest component and German retail sales came in at -2.8% versus estimates for -1.2%. Retail sales in Spain plunged -8.9%. Business confidence reports across the southern half of Europe are falling and the Eurozone business and consumer survey dropped as well.

The European Central Bank (ECB) reduced interest rates by 0.25% to 0.50% in a widely telegraphed move. ECB President Mario Draghi held a press conference after the ECB meeting. In his comments he suggested that the EU needs to focus on tactics for growth and not austerity. Draghi also suggested the ECB might start charging European banks on their overnight deposits. The hope here is that a negative interest rate would stimulate more lending, which would help fuel more economic activity.

Major Indices:

The large cap S&P 500 index had a good week with a +2.0% gain. The breakout past round-number, psychological resistance at the 1,600 mark is significant. Year to date the S&P 500 is up +13.2%.

Last week I suggested that if the rally continues the next level of resistance is probably 1620. The rally stalled at 1618.46 on Friday. The better than expected jobs number sparked a short squeeze on Friday morning. The rest of Friday was spent drifting lower. Odds are good the S&P 500 is going to retrace the Friday morning climb. Bulls will want to see the S&P 500 test 1,600 as new support.

Intraday chart of the S&P 500 index:

There is no denying that the trend is up. Should the rally continue we can expect potential resistance in the 1640-1650 zone. On the other hand if the market reverses there are several levels for potential support including 1600, 1580 and 1540. Odds are good that this breakout to new highs may have silenced concerns over a massive triple top for the S&P 500 index.

chart of the S&P 500 index:

The tech-heavy NASDAQ was a big winner with a +3.0% gain last week. Year to date the NASDAQ is up +11.8%. The index has broken out past resistance near 3300 and is quickly approaching likely round-number resistance at 3400. These are twelve and a half year highs. The NASDAQ has only seen two down sessions since it reversed from the mid April lows. On a short-term basis the index is overbought and due for a pullback. Broken resistance near 3300 should be new support.

Daily chart of the NASDAQ Composite index:

The small cap Russell 2000 index ($RUT) managed to keep pace with the S&P 500 and post a +2.0% gain last week. Also noteworthy was the lack of follow through on Wednesday's bearish reversal and Friday's breakout to new all-time highs. You could probably still argue that the $RUT is hovering near resistance at its 2013 highs. I'd like to see a close above 960 to really confirm the bullish breakout. If we do see the $RUT continue higher it will be a bullish sentiment indicator. I suspect that 1,000 level will be significant resistance but until the $RUT gets there the 1,000 level could also act like a magnet.

chart of the Russell 2000 index



Economic Data & Event Calendar

The calendar just rolled over from April to May and all of the end of month and beginning of month reports are now out. This has created a lull on the economic calendar. The Q1 earnings season is also over as well.

Economic and Event Calendar

- Monday, May 06 -
Eurozone Retail Sales data

- Tuesday, May 07 -
Eurozone Industrial Production

- Wednesday, May 08 -
Chinese CPI

- Thursday, May 09 -
Weekly Initial Jobless Claims
wholesale inventory data

- Friday, May 10 -
Chinese new loan data

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:

Anyone paying attention already knows that the U.S., European, and Chinese economies are slowing down. Yet the market doesn't seem to notice or care. Eventually economic data is going to matter but for now we're living in a fantasyland. All that matters is the Federal Reserve, ECB, Bank of Japan and Bank of England continue to pump money with their various QE programs. This is driving asset prices higher.

One analyst has tried to explain the rise in stocks suggesting investors see no other alternatives. Do investors want to buy U.S. or German treasuries that yield less than 2% or would they rather buy equities that offer both capital appreciation and a yield? The bond market has its own problems. After a 30-year bull market in bonds investors are wondering if there is any upside still left. Plus, long-term, when the Federal Reserve tries to unwind all of these asset purchases it's going to cause inflation. That's going to hurt the bond market. One firm, Edward Jones, has gone so far as to warn all of its 7.5 million clients with a letter from management warning them about the risk associated with the bond market.

Last week I shared the adage "It's okay to be wrong; it is not okay to stay wrong." I have been suggesting that the market would peak and begin a normal correction lower sometime in the mid-April to early May time frame. I'm almost out of time on that forecast. If market participants are going to ignore all the negative economic data it's hard to be bearish.

I am still concerned with some of the geopolitical risks that could affect the market. This past week South Korea pulled the last of its remaining workers at the jointly run Kaesong industrial complex. This is the first time since the factory opened in 2004 that it has been completely shut down. This quiet escalation between North and South Korea doesn't bode well.

Another hot spot garnering more headlines is Syria. Just a couple of days ago Israel has hit multiple targets in Syria. Israel denies the story but sources suggest that Israel has struck at several key weapon sites. Four months ago Israel hit a weapon convoy in Syria to prevent weapons between transferred to the terrorist organization Hezbollah. It looks like the new strikes this past week were more of the same as the Jewish state tries to prevent Hezbollah from gaining more sophisticated and more accurate weaponry.

Why does this matter to us? It matters because Syria is calling the latest move a "declaration of war" by Israel. I seriously doubt Syria, currently embroiled in a civil war, could also mount a successful offensive against Israel but then I'm not a mid-east policy analyst. Part of the problem are Syria's allies. Both Iran and Russia are major allies and if Syria claims it is at war with Israel then things could get complicated.

At the same time the U.S. is still investigating whether or not Syrian chemical weapons have been deployed and by whom. Obama has claimed in the past that if chemical weapons are used then we'll get involved. I'm not sure how much political currency the White House wants to spend on launching new military actions in the mid east. Washington seems to be dragging its feet on the issue.

As I look ahead at the week in front of us the path of least resistance for stocks is up. Yet the market might be facing a lack of catalysts to keep the rally going. I would not be surprised to see the market consolidate sideways first to work off some of its overbought conditions.

James