The first full trading week of May was dominated by stock market bulls. Equities were in rally mode around the world with the U.S., Europe, and Asia seeing strong gains. New data this week would suggest retail investors are turning more bullish with inflows hitting new eight-week highs. Meanwhile shorts are giving up with short interest contracting. A sharp sell-off in the U.S. bond market prompted bond giant PIMCO's Bill Gross to tweet that the 30-year bull market in bonds was dead. A sudden acceleration higher in the U.S. dollar is putting pressure on commodities. The Dow Industrials was one of the market's weaker performers but still managed another high. The Industrial Average has not had a losing streak of more than two days this year. That's the longest streak of this type in 55 years. Year to date the Dow transportation average is up +20%, the banking sector is up +14%, biotechs are up +29%, the semiconductor sector is up +21%, and housing is up +19%.

It was a quiet week for U.S. economic data. The weekly initial jobless claims came in at 323,000. That's the lowest reading since January 2008.

After several weeks of negative economic data the European region finally had a few positive reports. Several countries reported positive services PMI numbers. Many are still in contraction/recession territory but they were better than expected. Germany saw its March factory orders come in at +2.2% compared to estimates for a -0.5% decline. The English FTSE index has rallied to five-year highs. The Germany DAX index has broken out to a new all-time, record high.

The economic data in China was mixed. The HSBC services PMI report slipped to 51.5, down from 54.3. Numbers above 50.0 show growth and this report is nearing negative territory. In positive news China said its exports surged. Last month China actually had a trade deficit but exports resume, which is a positive sign for the global economy. Meanwhile Japan is benefitting from the country's current policy to weaken the yen. The Japanese yen has fallen below 100 against the U.S. dollar for the first time in four years. This has helped fuel a nearly nonstop rally in the Japanese NIKKEI stock index, which just hit new five-year highs (+6.7% for the week).

Major Indices:

The large cap S&P 500 index added another +1.19% for the week and is up +14.5% year to date. Market participants were buying the dips near 1625 the last couple of days. It looks like the S&P 500 is poised to make a run towards 1650, which might be the next psychological resistance level.

It is worth noting that on a short-term basis the S&P 500 is overbought. That doesn't mean it can't grow more overbought. I recently heard one analyst's opinion that the S&P 500 is likely to see some short-term weakness but it will prove to be a buying opportunity before the index rallies to 1700 in the next couple of months. I am not saying I agree with this opinion but momentum is clearly higher.

Technically I would look for support near 1600 on a pullback. If 1600 fails then support near 1580. Overhead I would expect some resistance near 1650 and then 1675.

chart of the S&P 500 index:

The NASDAQ composite was one of the strong performers among the major indices with a +1.7% gain on the week. Year to date the NASDAQ is up +13.8% and closed on Friday at new 13-year highs. Currently the NASDAQ looks very short-term overbought with its three-week rally from 3150 to 3435 (a +9% move).

Impressive strength in the biotech and semiconductor sectors is giving the NASDAQ A nice boost. Yet nothing goes up in a straight line for very long. If the NASDAQ were to correct from current levels I would expect a dip back to 3350, which is close enough to fill the gap from Mary 3rd, or a dip to 3300. Of course it might surprise me and bounce off its 10-dma. Should the NASDAQ keep climbing then the next level of resistance is probably 3450 and then 3500. The 3500-3550 zone could prove to be a tough area to break through since 3500 was resistance back in the year 2000.

Daily chart of the NASDAQ Composite index:

The small cap Russell 2000 index delivered a very strong performance with a +2.17% gain for the week and another round of new all-time highs. Year to date the $RUT is up +14.8%. The breakout past resistance near 950-960 is definitely bullish and $RUT bulls are probably targeting the 1,000 mark. I would definitely expect some short-term profit taking if the $RUT can tag 1,000. Broken resistance near 960-950 could offer some support.

Keep in mind that while the $RUT is outperforming on the way up it will also underperform on the way down with exaggerated losses. In the meantime, strength in the small caps is a positive sentiment indicator for the market as a whole. If money managers were nervous about the market they tend to pull money out of small caps and put it into more liquid large caps.

chart of the Russell 2000 index



Economic Data & Event Calendar

The pace of economic data picks up a bit this week. Chinese industrial production might make headlines on Monday. EU finance leaders will be meeting on Monday. On Wednesday we'll see GDP growth estimates from both the Eurozone and Japan.

Previously the U.S. debt ceiling deadline was May 18th but changes in policy and a bump in tax receipts have allowed politicians in Washington to push back the deadline to September.

Economic and Event Calendar

- Monday, May 13 -
Chinese industrial production
Chinese retail sales data
U.S. April retail sales data
Business inventories
Eurogroup meeting
EU Finance ministers meeting

- Tuesday, May 14 -
German ZEW (sentiment) index

- Wednesday, May 15 -
Eurozone GDP estimate
Japan GDP estimate
Producer Price Index (PPI)
New York Empire State manufacturing survey
U.S. industrial production

- Thursday, May 16 -
Weekly Initial Jobless Claims
Eurozone inflation data
Consumer Price Index (CPI)
housing starts and building permits
Philly Fed survey

- Friday, May 17 -
University of Michigan Consumer Sentiment

Additional Events to be aware of:

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

The Week Ahead:

As we look ahead we appear to be in a four-year old bull market that is not showing any signs of slowing down. The "average" bull market tends to last about four to five years. Who knows how long this one will last. Currently market participants are ignoring economic data. We did see a little bit of improving economic data from China and Europe this past week but the overall trend for economic growth is still down. The stock market doesn't care because the Federal Reserve and most of the major central banks continue to pump money into the system.

Investors are faced with a lack of alternatives. There seems to be no attraction to putting your money in the bond market, which is currently yielding less than 2% for a 10-year bond and according to Mr. Bill Gross, has just peaked. It's certainly possible that the overly hyped "great rotation" out of bonds and into stocks might actually be starting. If this is true then the rotation out of bonds could be a long-term tailwind for equities. Investors are also facing the powerful psychological urge that they need to get into the market or they'll miss out on further gains.

I will point out that U.S. margin debt is hitting extremes. We've mentioned this before in the last couple of weeks. We will likely see margin debt hit an all-time high, nearing $400 billion, by the end of May. The last time margin debt was this extreme was back in 2007 just prior to the market meltdown. As a contrarian indicator this might be considered bearish.

Doing my research for tonight's commentary there seemed to be a trend in analysts opinions. Essentially, the opinion I read over and over again was, the stock market trend is up but when it breaks down it's going to be bad. Geez, thanks a lot! Of course it's going to be bad. Anyone who has suffered through a market correction or a bear market thinks it's bad. You could use the rubber band theory. The harder and longer you stretch a rubber band the quicker and more powerfully it snaps back. Bears could argue the market is over-stretched to the upside.

Long-term the market does face significant issues. Europe has not fixed its problems. I am still concerned that the Cypriot bank robbery of depositor assets may have been the death knell for the Eurozone. There was another article out this past week suggesting the EU may have to use that tactic again. I can't see how citizens are going to let that occur. Back here at home, when the U.S. Federal Reserve decides to unload its bloated balance sheet this country will likely see painful inflation. Yet these issues are not going to affect us next week.

Right now this market is all about the Fed and its current QE program. Any hint that the Fed might lower its QE purchases and the market stumbles. That's why Monday could be a down day for the U.S. market. On Friday night, after the closing bell, the Wall Street Journal posted an article by Jon Hilsenrath discussing the Fed's potential strategy to slow down their QE program. Of course the time frame is likely to be Q4 2013 or some time in 2014. Odds are good there is a virtual crowd of traders just hoping for a market pullback so they can buy the dip.

Personally, it's tough to be bullish on the market given the state of economic growth but it's hard to fight the trend. This seems to be a buy-the-dip sort of market. I suggest investors enter positions cautiously. Start small and slowly build up your position size. Don't forget to monitor your stop losses on a regular basis.

We don't know what the next catalyst will be that sparks a reversal in stocks. Considering the current investor mood of ignoring economic data it's unlikely to be a normal monthly data report. That means the catalyst might be a geopolitical event. North Korea, Syria, and Iran could all be potential trouble makers down the road.

If you believe in Murphy's law, then my capitulation that the stock market is not going to reverse lower in the April-May time frame might just be the perfect contrarian sell signal.

James