Ding! Ding! Ding! That's the end of the first half to 2013. The bulls have delivered an impressive performance but they look like they're getting tired. The S&P 500 managed a +0.8% bounce for the week, ending a two-week retreat. From the May 21st close of 1669 to the June 24th close at 1573 the S&P 500 saw a -5.8% correction before bouncing this past week.

After investors reacted poorly to Ben Bernanke's comments two weeks ago the Federal Reserve came out with a full-court press and every Fed head with a microphone came out defending their QE3 program. They promised the Fed would not start tapering until economic data justified a reduction. This extra effort by the Fed and the combination of end of quarter window dressing helped fuel a three-day bounce in stocks.

It is likely that some of the money hitting equities came out of the bond market. June saw the largest one-month redemptions (outflows) from bond ETFs and bond mutual funds every with investors pulling almost $62 billion out of the bond market. The sell-off in bonds has had a big impact on mortgage rates, which surged at their fastest one-week pace in 26 years and closed at highs not seen since July 2011.

2013 has seen the best yearly start for the S&P 500 index since 1998. Thus far the S&P 500 index is up +12.6% year to date. The Dow Jones Industrial Average is up +13.7%. The NASDAQ composite is up +12.7%. Gold is down -26% and the second quarter was the worst quarterly performance in gold in 45 years! Silver has plunged -35% for the year.


One-Paragraph Market Summary

I am going to try and save you some time with a one-paragraph summary for those that do not want all the details below. Stocks were short-term oversold. Window dressing helped fuel a bounce but the rebound has stalled at technical resistance. The intermediate trend is still bearish with a pattern of lower highs and lower lows. Odds of a retest of the June 24th lows is high. Yet the first week or two of July tend to be moderately bullish. We could see stocks churn sideways until the start of Q2 earnings season, which starts on July 8th but doesn't really pick up speed until the 15th. Volume this week will be light with the July 4th holiday on Thursday. Many market participants will be out of town. Disappointing economic data out of China could spark more weakness on Monday. Friday's session could be very volatile as those traders still watching the market react to June's nonfarm payrolls (jobs) report. That's it! Now on to last week's details.


Economic data was very mixed. The Q1 GDP number was revised lower to +1.8% growth. That's down from the previously reported +2.4% growth. What is troublesome is the slowing consumer spending numbers, which fell from +3.4% to 2.6%. Consumer spending accounts for about 70% of the U.S. economy and this decline doesn't portend good things for the economy. Oddly enough there is a disconnect between spending and confidence. The Conference Board's Consumer Confidence index rose from 74.3 in May to 81.4 in June, which is a 5 1/2 year high. The University of Michigan's Consumer Sentiment Survey advanced from its earlier reading of 82.7 to 84.1. That's just below the six-year high set in May at 84.5. Another sentiment gauge, the Bloomberg confidence survey also rose to its highs levels in over five years.

The Chicago PMI plunged from 58.7 in May to 51.6 in June. That was the biggest one-month drop in four years and below expectations for a pullback to 55. Numbers below 50.0 indicate contraction so this index is almost in contraction territory. The Kansas City Fed regional manufacturing survey fell from +2 to -5. Economists were expecting a bump to +3. Negative numbers here suggest an economic contraction. The new orders component fell from +6 to -10 and the production component plunged from +5 to -17. Bucking the trend was the Richmond Fed survey which rallied from -2 in May to +8 in June. While we're talking about manufacturing the durable goods orders improved +3.6% in May.

On the housing front pending home sales for May surged +6.7%, which was way above expectations. One reason consumers might feel more confident is the rise in home prices. The Case-Shiller 20-city home price index advanced +12.0% year over year. That's a huge move. Odds are this trend is going to slow thanks to surging interest rates. The recent spike in rates has seen mortgage applications crash.

China remains a market mover. Last Monday (June 24th) the Chinese market plunged -5.3% as investors worried over liquidity and a potential credit crunch in the banking system. The weakness last Monday helped fuel the spike lower in U.S. markets that same day. The market has been right to worry over China's slowing economy. The trend continues with Chinese exports falling to +1% in May, which was a 12-month low. This week will see more data out of China with the country's manufacturing PMI data out on Monday. Expectations are for a drop into contraction territory below the 50.0 mark.

China has taken the spotlight off Europe but problems persist for the EU. ECB President Draghi tried to soothe investors fears by repeating his claim that the ECB is poised to act if the system needs it. Yet investors ignored him with European stocks falling to new seven-month lows. If you're living in the EU beware what bank you keep your money. This past week Eurozone officials basically agreed that future bank bailouts will include a "bail-in" component just like the "bail-in" that robbed depositors in Cyprus.

Major Indices:

Last week I warned readers that, "Technically the stock market looks short-term oversold. I am expecting a short-term bounce. Odds are good the S&P 500 may find resistance near its 50-dma and the 1620 area." The index did not disappoint with a clean-cut failure at the 1620 level on Thursday. Another troubling development is that this failure at 1620 also coincides with a 61.8% Fibonacci retracement of the recent sell-off (see chart below). I strongly suspect that we will see the S&P 500 retest its June 24th lows near 1560 and if that level fails the next area of support should be the 1540 level. On the other hand if the market rallies then the mid-June highs near 1650 are likely resistance.

chart of the S&P 500 index:

Intraday chart of the S&P 500 index:

Weekly chart of the S&P 500 index:

The NASDAQ composite bounced toward the bottom of its gap down and stalled. I suspect we will see it retest the trend line of support and its 100-dma.

chart of the NASDAQ Composite index:

The small cap Russell 2000 index outperformed its large-cap peers with a +1.37% bounce for the week. You could still argue the $RUT is forming a bull-flag consolidation pattern but I would be cautious. if the $RUT reverses here it will likely see a retest of the 945 area or hit that trend of lower lows (see chart).

chart of the Russell 2000 index



Economic Data & Event Calendar

It's a holiday shortened week but it will be a busy one for economic data. The ISM and ISM services data will be released. The U.S. markets will be closed on July 4th for the Independence Day holiday. Many traders will make it a four-day weekend and not trade on Friday. That means volume will be weak for the nonfarm payrolls (jobs) report due out Friday morning. Low volume plus the jobs data could spell lots of volatility. Economists are expecting +165,000 new jobs in June. May's number was +175K. Remember, we could see a case of bad news is good news since a low jobs number will keep the Fed on the sidelines and keep QE3 going longer.

Since we're talking about the calendar it's worth noting that the first week or two of July tend to have a slightly bullish bias. It's the beginning of a new quarter and the start to the second half of the year. Money managers will have new money to put to work. Fund managers will still be adjusting for the Russell indices rebalancing that just occurred on Friday.

Economic and Event Calendar

- Monday, July 01 -
ISM index
Eurozone PMI data

- Tuesday, July 02 -
Factory orders
auto & truck sales

- Wednesday, July 03 -
Weekly Initial Jobless Claims
ISM services
ADP Employment Change report
Eurozone services PMI data

- Thursday, July 04 -
U.S. markets closed for holiday
European Central Bank (ECB) interest rate decision
ECB press conference

- Friday, July 05 -
Nonfarm payrolls (jobs) report

Additional Events to be aware of:

July 17th - Fed Chairman Bernanke before congress
September - U.S. debt ceiling deadline

The Week Ahead:

Personally my short-term bias is down for the market. The failed rally in the S&P 500 at resistance is pretty clear cut. Of course that could be the problem. It's so clear cut that everyone can see it and the market likes to make fools of people. There are probably a lot of investors shorting the market at these levels and any strength above 1620 on the S&P 500 could spark some short covering. Combine that with a light-volume week due to the July 4th holiday and any short covering could be exacerbated.

I would bet on a retest of the June 24th (Monday) lows. However, the U.S. markets may be stuck churning sideways as investors wait for the Q2 earnings season to start. Corporate results and guidance could be the next catalyst to propel the market up or down. Will the second half of 2013 be better? Corporate guidance is going to help shape that expectation. Dow-component Alcoa (AA) officially kicks off earnings season on Monday, July 8th but the season won't really start until the following week (July 15th). At the same time Federal Reserve Chairman Ben Bernanke will be testifying before congress on July 17th during what used to be called the Humphrey-Hawkins testimony, his biannual update before congressional leaders.

I am still bullish between now and yearend but July, August and September tend to be weak months for the stock market. Odds are good the correction is not over yet. We will have a much better outlook on the second half after Q2 earnings season is over. There is no reason to rush into trades. Let the market come to you.

James