Stocks managed another rally during the shortened holiday week in the U.S. All the major U.S. indices managed to rise with most of the gains coming on Monday, July 1st, and Friday, the 5th. News of a military coup in Egypt that ousted President Morsi after just one year in office failed to dent investor enthusiasm for stocks. Yet news of the coup did push oil prices higher with crude oil ending the week above $103 a barrel. The better than expected headline number on the U.S. jobs report Friday morning (+195,000) help fuel gains for both stocks and the U.S. dollar.

The dollar index now sits near a three-year high. This dollar strength is pushing precious metal prices lower with gold, silver, and copper prices falling. Meanwhile the U.S. bond market continues to crash with rates on the 10-year treasury surging +8.5% on Friday and the yield closing at 2.715%, almost a two-year high. The latest data now suggests a record-setting $80 billion was withdrawn from U.S. bond-related funds in June.

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

One-Paragraph Market Summary

In an effort to save you, the reader, more time, I'm providing a one-paragraph market summary and my opinion for next week. Keep reading below this paragraph for more details. Last week most of the economic data in the U.S. was actually positive, at least if we ignore the details beneath the job data numbers. Economic data in Europe last week was mixed. Meanwhile numbers out of China continue suggest the country is still slowing down too fast. What is troubling is the return of the Eurozone financial crisis with Greece and Portugal on the brink of collapse and Italy getting worse. Meanwhile the geopolitical risks in the Middle East are multiplying with the civil war/proxy war in Syria and now a coup in Egypt. Technically Friday's climb in the market looks bullish but it could be a trap given the very low volume on Friday. Further gains in the U.S. market could spark some short covering but I suspect this week stocks will move sideways as investors wait for earnings season. The Q2 earnings season starts on Monday, July 8th, but doesn't really pick up speed until Monday, July 15th. Seasonally the next ten to twelve weeks are usually weak for stocks.

The national ISM index came in at 50.9 in June. That is an improvement from May's reading of 49.0 and puts the U.S. back in "growth" mode with the close above 50.0. June's reading on the ISM services index came in at 52.2. That was down from May's 53.7. Construction spending in the U.S. rose +0.5% in May, which is improvement from the downwardly revised +0.1% gain in April. The ADP Employment Change report for June came in at +188,000 jobs, which was above expectations and set up a positive expectation for the jobs report on Friday.

The major economic report for the week was the nonfarm payroll (jobs) report on Friday morning. Economists were only expecting +165,000 new jobs for the month of June and many were actually expecting a disappointment. The government report announced +195,000 new jobs. If that wasn't good enough for you they revised the month of May's jobs number up +20K to +195,000 and they revised April's from +149K to +195K. Suddenly we have a three-month trend of +195,000 job growth. If you've been paying attention to the Federal Reserve, they said they wanted to see multiple months of +200K job growth before they act and consider tapering their QE3 program.

This could have been a case of good news is bad news. Traders could have decided to sell the jobs data because it means the Fed is likely to taper sooner than Wall Street would like. However, the flip side to that coin would suggest that the Fed will taper because the economy is getting healthier, right? Maybe, maybe not. The jobs number was better than expected but the unemployment rate was unchanged at 7.6%. That's because the labor force grew by +177,000 people who started looking for work again. The Fed said they wanted to see +200K a month job growth but they also wanted to see unemployment fall to 6.5%.

Another problem is the strength behind that jobs number. Most of the job growth (60%) was part-time service jobs (like waiters and bar tenders). These are not high-paying jobs. The number of workers in America who are "underemployed" is surging and June saw the level rise from 13.8% to 14.3%. That's the highest reading since February this year. The underemployed are those who would like to have a full-time job but they can't find one so they're working part time to help pay the bills.

Depending on which analyst you choose to listen to the number of full-time jobs in America has fallen between -240,000 to -326,000. They're being replaced by part time jobs. According to an Investor's Business Daily article, we've only seen +130,000 full-time jobs added in the U.S. for the first six months of 2013. The rest of all the jobs added this year (about 557,000) have been part-time. One potential culprit for this is businesses trying to prepare for Obamacare and the burden of healthcare costs for full time employees.

China

This past week saw the official Chinese manufacturing PMI data come in at 50.1. That was down from 50.8. Numbers above 50.0 indicate growth and below that indicate contraction. The HSBC manufacturing PMI report on China has been below the 50.0 level for months. HSBC's latest PMI reading showed China tick lower from 48.3 to 48.2. Plenty of market watchers have long distrusted the official Chinese numbers. China is a communist country and they have been caught lying about their economic data in the past. What makes the latest official PMI report so important is that data on several of the components that make up the national PMI report were missing. The Chinese government decided to not provide this data. Why would they do that? Naturally some analysts believe the Chinese government is deliberately trying to hide or mislead economists on the actual health of their economy. One could infer that their economy is slowing down a lot faster than they want us to believe. That doesn't bode well for the global economy.

Europe

Most of Europe remain in a recession but some of the economic data is improving. The Eurozone manufacturing PMI report came in better than expected at 48.8, up from 48.7. The Eurozone services PMI slipped from 48.6 to 48.3. Numbers below 50.0 indicate contraction. One area that is not improving is unemployment which tagged a new all-time high at 12.1%. Car sales are another indication of their slow economy with EU car sales at a 20-year low. A few days ago the European Central Bank (ECB) left its interest rate unchanged at 0.5%. ECB President Mario Draghi said that this rate would remain low for "an extended period".

More importantly the EU financial crisis is back after months of simmering in the background. This past week EU officials gave Greece a three-day deadline to prove their reforms were on track. Otherwise the EU and IMF would deny Greece their next tranche of bailout money. Of course it is widely believe that Greece will eventually default again and get kicked out or leave the Eurozone. You could easily argue that the EU is merely throwing good money after bad money.

The big surprise this past week was the breakdown in Portugal. Again, it's another small EU country with a population and GDP slightly less than Greece. Unfortunately the recent turn of events has led Portugal's finance minister and foreign minister to resign. The country's prime minister has not accepted their resignations but it's definitely throwing doubt on Portugal's ability to pay its debts and raises fears about the future of its 78 billion euro bailout it received back in 2011. This financial instability in Portugal has pushed the yield on its 10-year bonds to 7.72%. Usually when the yield on a country's 10-year bond rises past 7% it's a major warning sign of a potential collapse. It's assumed that rates above 7% for any prolonged period of time means the country can't afford to pay the interest on its debt. This sudden weakness in Portugal is fueling worries about Spain and Italy and pushing their bond yields higher as well.

The situation in Italy is getting scarier. Italy's population is more than five times larger than Greece or Portugal and Italy's GDP is about eight times larger at $2.0 trillion. Italy is the Eurozone's third biggest economy and they have a massive debt load that's more than 100% of their GDP. There were new stories out this past week suggesting that Italy may be forced to ask for an EU/IMF bailout within the next six months. The IMF just downgraded their 2013 GDP estimates on Italy from -1.5% growth to -1.8%. I recently mentioned how there are dozens of retail outlets in Italy that are shutting down every single day. The economic burden is so bad that there has been a surge in suicides across the country. If Italy breaks down and comes to the EU looking for help it's going to wreak havoc on investor confidence.

Egypt

I am not going to go into too many details on Egypt. The developments in Egypt have not had much impact on the U.S. stock market so far. The country of Egypt was swept up in the "Arab Spring" that engulfed the Middle East back in 2011. Massive protests led to President Mubarak's resignation. Several months later the Muslim Brotherhood candidate Mohammed Morsi was elected President in summer 2012. It would appear that the majority of Egyptians were unhappy with Morsi. Many claim that Morsi was no better than Mubarak and Morsi failed to follow through on his promises. Others were concerned that Morsi and his Muslim Brotherhood allies were taking the country too far toward an Islamic state. Many of the complaints against Morsi were the crumbling economy, power outages, food shortages, and rising crime.

It took 18 days for massive protests to bring down President Mubarak. This time it took about three days before the military stepped in and said Morsi was removed as president. The protests last week were some of the largest the planet has ever seen with millions taking to the streets. Estimates suggest between 15% to 20% of Egypt's 85 million people were in the streets protesting. The challenge now is which direction does Egypt go? Removing a democratically elected president from power does not set a very good precedent. An interim president has been appointed but Morsi supporters have not given up. There have been deadly clashes between pro-Morsi and anti-Morsi supporters. Many of the pro-Morsi (pro-Muslim Brotherhood) supporters have promised to use suicide bombings if Morsi is not reinstated soon. It's a tense situation. Approximately four percent of the world's oil trade flows through the Suez canal. This political unrest has helped drive up the price of oil as investors worry about who controls the canal.

Major Indices:

The S&P 500 index produced a +1.59% bounce last week. After failing at the simple 50-dma multiple times the index actually broke through this technical resistance on Friday. I am advising caution here. Yes, it's a bullish move higher but volume on Friday was very light. A lot of people were on vacation for the day. It is no coincidence that the S&P 500's rally stalled right at its down trend line of resistance (see chart) and resistance at the prior trend line of support.

If the S&P 500 can build on Friday's rally then stocks might see some short covering. However, a failure here at this level might signal a drop back toward its June 24th lows.

Intraday chart of the S&P 500 index:

chart of the S&P 500 index:

The NASDAQ's bounce (+2.2% last week) has produced a bullish breakout past resistance near 3450 and the trend of lower highs. Now the challenge for the bulls is the mid June high and the May peak. If the market sees a pullback we can look for support near the 3400 level.

chart of the NASDAQ Composite index:

The small cap Russell 2000 index probably has one of the strongest looking charts among the major indices. The $RUT added +2.8% last week and closed above round-number resistance at the 1,000 level. This is a new all-time closing high. The intraday high is 1008 from six weeks ago. If this rally in the $RUT continues it could actually pull the rest of the market higher.

A breakout to new highs probably leads to the 1020 level. If you believe the recent consolidation looks like a bull-flag then a good multi-week target would be the 1050 level. Meanwhile a failure here probably means a dip back toward 980 and if that fails then the 100-dma.

chart of the Russell 2000 index



Economic Data & Event Calendar

The economic data and event calendar this week is relatively quiet. Monday is the start to Q2 earnings season although the pace of reports won't pick up until Friday. The FOMC minutes on Wednesday could be a market mover if it reveals any surprises. The wild card could be the Greek bond auction on Tuesday. If the bond auction fails it could hasten the country's collapse and the exacerbate the EU financial crisis.

Economic and Event Calendar

- Monday, July 08 -
Chinese CPI data
Eurozone finance minister meeting
Q2 earnings season begins

- Tuesday, July 09 -
Greek bond auction

- Wednesday, July 10 -
Wholesale inventory data
FOMC minutes

- Thursday, July 11 -
Weekly Initial Jobless Claims
import/export prices
Bank of Japan interest rate decision

- Friday, July 12 -
Producer Price Index (PPI)
University of Michigan Consumer Sentiment
Eurozone industrial production

Additional Events to be aware of:

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

The Week Ahead:

Looking ahead to the next five trading days it is tough to say with any certainty where stocks are going. Last weekend I was expecting the market to pullback and potentially retest the June 24th lows. Now with the S&P 500 index up for the week and testing another level of resistance that could still happen. On the other hand a breakout here could definitely spark some short covering. Although I would not be surprised to see the market churn sideways as investors wait for earnings season to pick up speed.

Right now Wall Street expects the average earnings report to show +3.3% earnings growth but just +0.5% revenue growth. Investors and analysts will want to know if the U.S. sequestration cuts are hurting business. They will want to know if the slowdown in Europe and China is hurting business. We will also want to hear positive corporate guidance. Is business truly poised to improve in the second half? If the revenue numbers disappoint and/or if guidance is too cautious it could undermine the market's longer-term up trend.

Another issue is the calendar. The second half of summer is historically a weak period for stocks. The market tends to peak in June or July and then slide lower through August and September, and then bottom in October. Obviously every year is different but that's the pattern.

The Q1 earnings season saw the market rally because Wall Street had lowered and re-lowered their estimates. Finally estimates were so low that they were too easy to beat. Estimates for the Q2 season have been lowered in recent months but it doesn't have the same tone as Q1. That could set the market up for disappointment and thus another pullback.

James