Federal Reserve Chairman Ben Bernanke continues to be the bull market's best friend. Mr. Bernanke's comments on Wednesday helped poured fuel on the fire and stocks delivered one of the best weeks of the year. The S&P 500 index, the Dow Industrials, and the Russell 2000 index all ended the week at all-time closing highs. The NASDAQ closed at a new 13-year high. Gold and silver produced strong oversold rebounds. Crude oil surged to close over $106.00 a barrel. Another metric making a new high was mortgage rates, which rose to new two-year highs. The U.S. dollar retreated from its recent highs while the bond market managed a bounce. The yield on the 10-year treasury ended at 2.601%. Year to date the S&P 500 index is up +17.8%, the Dow Industrials are up +18.0%, the transportation average is up +21.3%, banking index +25.7%, the semiconductor index +27.4%, and biotechs +40.8%.

One-Paragraph Market Summary

The market rally continues as the Federal Reserve reassures investors that reducing QE is not the same thing as raising rates. Bernanke's comments also helped reinforce that the Fed will keep rates low for an extended period of time. QE is the only thing that seems to matter to stocks. The market is ignoring the meltdown in Europe and the slowing Chinese economy. There is a growing trend of economists lowering their U.S. GDP estimates as well. Meanwhile rising gasoline prices could crimp consumer spending and soaring mortgage rates could put the brakes on the housing sector. The first wave of earnings data seems to be positive thanks to really low expectations. Earnings season will hit full speed soon and corporate guidance could have a big impact on keeping the rally alive or killing it. That's assuming a disappointing Chinese GDP number doesn't spark some profit taking first.

Economic data last week was mixed. The Producer Price Index (PPI) came in at +0.8%, which was higher than May's +0.5%. The rise was fueled by a jump in commodity prices, including gasoline prices. Consumer sentiment retreated from its recent highs. The University of Michigan Consumer Sentiment survey saw the preliminary July reading drop to 83.9 from June's 84.1. May's reading has been the cycle high at 84.5. The internal components saw a divergence with present conditions surging from 93.8 to 99.7 yet the expectations component dropped from 77.8 to 73.8.

The Federal Reserve said that consumer credit grew by almost $20 billion in May. That was an improvement over April's +$10.9 billion. This is a good sign for the U.S. economy. Speaking of the Fed the Fed minutes from the latest meeting made headlines last week. It seems that several members think that we should cut back on their QE purchases sooner rather than later. Of course the previously mentioned comments from Bernanke on Wednesday night really gave the market a jolt higher. Bernanke confessed that the U.S. labor market is not showing the true health of the unemployment situation and unemployment (and the under employed) is actually worse than the numbers might suggest. The market interpreted that as a sign that the Fed would stay accommodative for a very long period of time.

Europe

The situation in Europe continues to deteriorate. Last weekend I mentioned how the EU & IMF had given Greece a deadline to show they were complying with all the rules and achieving the Troika's guidelines before receiving the next tranche of aid. It looks like EU played chicken with Greece and the EU blinked. This last week the EU-IMF issued a statement that said Greece had made progress but there was still work to be done and they would review the situation again before sending Greece its next round of bailout money. Meanwhile the situation in Greece continues to worsen. Greek GDP is estimated to fall -5% this year but whisper numbers put it closer to -7%. Greek unemployment hit another new all-time high at 26.9% in April.

Fitch rating agency downgraded France's credit rating from AAA to AA-. France is one of the largest and strongest of the Eurozone members so that doesn't bode well. Standard & Poor's downgraded Italy's credit rating from BBB+ to BBB, which is almost junk bond territory. The IMF recently downgraded their forecast on Italy to -1.8% GDP growth. I mentioned Italy recently and how it's the third largest economy in the Eurozone and the slowdown in Italy is so bad that dozens of business are closing up shop every day and they are suffering from a rash of suicides.

Portugal remains in the headlines as well. As the country tumbles into economic turmoil it's also suffering some political scandals as well. There are stories that the EU and IMF are already working on a second bailout for Portugal because the first one, 78 billion euros, has failed. Yields on 10-year Portuguese bonds has risen above 7%, which is the danger zone before a country's economic health collapses.

China

China remains in the headlines and will continue to impact our markets this week as well. Citigroup recently lowered their 2013 GDP forecast on China from 7.7% to 7.4%. That's probably being generous. The official Chinese GDP goal is 7.5% growth in 2013. Yet a Chinese finance minister was quoted last week suggesting that China may only hit 7% and could actually see a drop to 6.5% growth. That does not bode well at all considering China's impact on the global economy. The Chinese government is supposed to release its Q2 GDP estimate on Monday (that will be Sunday night for us in the U.S.). If this Chinese GDP number is too soft it could spark some selling across the global equity markets including here in the U.S.

Major Indices:

The U.S. stock market is definitely in rally mode. Stocks are up three weeks in a row. The S&P 500 has closed at a new all-time closing high thanks to a +2.9% gain last week. This large cap index is up almost +18% for the year. After a three-week rally it might be time for a little profit taking but that may depend on the Chinese GDP numbers and earnings results this week.

The next level of overhead resistance for the S&P 500 is the 1700 mark. This close to it the 1700 level might actually act like a magnet. On the other hand if the S&P 500 retreats we can watch for likely support at 1640, 1620 and 1600.

chart of the S&P 500 index:

The NASDAQ composite has produced a very impressive rally. The index is up 300 points from its late June lows near 3300. The current rally appears to be a breakout from a bull-flag consolidation pattern. If this pattern holds then the upside target would be the 3650 area.

Currently the NASDAQ has rallied to new 13-year highs. On a short-term basis the NASDAQ is overbought and due for some profit taking. On a pullback the NASDAQ may find some support near 3525-3500. I would expect slightly stronger support near 3450, which would be a 50% retracement of the three-week rally.

chart of the NASDAQ Composite index:

The small cap Russell 2000 index continues to show relative strength and is probably one of the strongest signals for this bull market. If money managers were worried about the market they wouldn't be buying small caps. Last week the $RUT added +3.1% and rallied to a string of new all-time highs. For the year the $RUT is up +22.0%. Like the rest of the major indices the $RUT is looking overbought on a short-term basis. There might be possible support near 1020 but I would look for stronger support near the 1000 level if the market actually sees any profit taking.

There is no way to know what the next resistance level is but 1050 could be round-number resistance. Of course the $RUT could pullback right here from the 1040 level since it's testing a trend line of higher highs (see chart).

chart of the Russell 2000 index



Economic Data & Event Calendar

I mentioned earlier that China's GDP estimate on Monday (Sunday night) could be a major event if the results disappoint. As far as economic data in the U.S. the Philly Fed is probably the biggest report to watch. Fed Chairman Bernanke will continue to grab headlines with a two-day appearance before Congress. This used to be called the Humphrey-Hawkins testimony. Bernanke will speak to the House financial services committee on Wednesday and then speak with the Senate on Thursday. One of the biggest events of the week will be the Q2 earnings season hitting full speed. Dozens of major companies will be reporting.

Economic and Event Calendar

- Monday, July 15 -
June retail sales data
New York Empire State manufacturing survey
business inventory data
Chinese economic data

- Tuesday, July 16 -
Consumer Price Index (CPI)
industrial production
German ZEW sentiment survey

- Wednesday, July 17 -
housing starts and building permits (for June)
Fed Chairman Bernanke before congress (the House)
Fed's Beige Book

- Thursday, July 18 -
Weekly Initial Jobless Claims
Philly Fed survey
Fed Chairman Bernanke before congress (the Senate)

- Friday, July 19 -

Additional Events to be aware of:

July 31st - FOMC meeting interest rate decision
September - U.S. debt ceiling deadline

The Week Ahead:

Looking ahead the trend for stocks is obviously higher. Yet the Chinese GDP number on Monday could spark some profit taking if it disappoints. I think I've mentioned the Chinese GDP report about three times now tonight. One has to wonder if the Federal Reserve is also worried about the slowdown in China and the financial meltdown in Europe. Even though several Fed members believe they should cut QE purchases "soon" they have taken a rather dovish tone when speaking out. Is the Fed trying to bolster the market before the market sees another parade of bearish economic data?

Earnings will be a major theme this week. Thus far the general tone for earnings results has been bullish. Most believe that results from the banking sector will be healthy. Yet if you exclude the banks results are dramatically lower. This very low expectation might be what saves the market. If the bar is low enough then corporations might be able to jump over it. This is a change from a week or two ago when the tone wasn't so pessimistic. The fact that United Parcel Services (UPS) just warned is not a good sign. They are a major transportation/freight company. You could argue companies like UPS are the lifeblood of the economy. If UPS is warning what does that say about economic activity? Is UPS the canary in the coal mine?

It is a little bit odd that stocks are in rally mode with so much negative going on in the world. Granted it's an old-time market maxim that bull markets climb the wall of worry. Yet how often do we have a proxy war in Syria, Egypt on the verge of civil war, Greece, Portugal and possibly Spain and Italy on the verge of economic collapse. China is slowing down way too fast. The U.S. is barely showing any growth at all. That's quite the wall of worry. Like I said earlier, the only thing the stock market seems to care about is the Fed's QE program. It probably does not hurt that the U.S. bond market is sinking and investors are pulling massive amounts of money out of bonds and some of that is making it into stocks.

It will be very interesting to hear what corporate America has to say about their guidance for the second half of this year. It seems that Wall Street is turning negative about U.S. GDP growth. Recently Barclays has downgraded their Q2 GDP estimate to just +0.6% growth. JPMorgan downgraded their Q2 GDP estimate to +1% growth. Goldman Sachs lowered their Q2 GDP estimate to +1.3% growth.

We may have to worry about consumer spending soon. The rise in crude oil to $106 a barrel is going to have a negative impact on fuel prices. Analysts are expecting the price of gas at the pump to surge +10 to +20 cents in the next week as gas adjusts to the new higher price of oil. The national average is already at $3.50 a gallon. At what points does gas finally curb consumer spending? According to some estimates every one cent that gasoline goes up removes one billion dollars in consumer spending. While I am on the topic of consumer spending if you work for the defense department it might be time to tighten your belt. Starting tomorrow (Monday, July 15th) about 650,000 civil defense workers will be furloughed due to the sequestration cuts. This works out to them being forced to take one unpaid day off a week, which is a -20% cut in their paycheck. This will last for the next ten weeks.

James