Investors seem unfazed by the lackluster quality of Q2 earnings results. Thus far almost 50% of the S&P 500 components that have reported earnings have missed Wall Street's revenue estimates. We did see the market rally stall this past week with the S&P 500 index hovering below resistance at the 1700 level. Bullish investors shouldn't worry yet. Traders appear to be in a buy-the-dip mood as losses were pretty mild. The Dow Jones Industrial Average managed to buck the trend and post another gain and thus extending its current run to five weeks in a row.

There were a few pockets of weakness with the transports down -1.7%, semiconductors -2.6%, homebuilders -5.0%, oil services -3.4%. Crude oil also retreated with a -3.5% drop for the week while gold and silver bounced, up +2.9% and +2.3%, respectively. One analyst noted last week that we are in the strongest bull market since the end of World War II. Meanwhile JPM's chief equity strategist believes there is more upside ahead since he raised their yearend S&P 500 price target from 1715 to 1775.

Economic data in the U.S. was mixed last week. New home sales rose for the third month in a row and hit a 5-year high. Yet existing home sales dropped -1.2%, which was below expectations. Industry analysts were expecting the recent rise in mortgage rates to spur buyers off the sideline in an effort to lock in low rates. Yet we're not seeing that happen. The number of mortgage applications continue to fall. The MBA mortgage index slipped -1.2% for the sixth weekly decline in a row. The refinance applications are down ten out of the last 11 weeks and at a two-year lows. Applications to purchase a home are at a four-month low. The missing surge of buyers to lock in rates is a bit ominous for the housing sector.

The Richmond Federal Reserve manufacturing survey was a disappointment with a drop to -11. Numbers below zero indicate contraction and economists were expecting the survey to hit +9. The durable goods orders for June saw the headline number come in at +4.2%, which was above expectations. Yet if you exclude the more volatile transportation component the number comes in flat (+0%). One of the biggest surprises for the week was the University of Michigan consumer sentiment survey. Their final reading for the month of July saw sentiment rally to a six-year high at 85.1. We can probably blame record highs for the stock market and rising home values for improving consumer attitudes.

Europe

Europe finally had some good news for a change. French consumer confidence rose above expectations to 82. The German Ifo business climate index also came in above expectations at 106.2. Meanwhile Spain's unemployment levels, while still dismal, improved from 27.1% to 26.2%. The Bank of Spain raised their Q2 GDP forecast from -0.5% growth to -0.1% growth. The second quarter will still be Spain's eighth quarter in a row of negative economic activity.

The best news was probably the improvement in Eurozone PMI data, which actually came in at a positive number. The composite PMI number hit an 18-month high at 50.4 and the manufacturing PMI set a two-year high at 50.1. Numbers above 50.0 indicate growth and expansion.

Let's hope that the U.S. Federal Reserve doesn't squash this new growth in Europe. Yes, I said the U.S. Fed. That's because the International Monetary Fund (IMF) recently expressed concerns that if the Fed begins to tighten their QE program it could push the Eurozone back into its debt crisis. The idea here is if the U.S. Fed begins to tighten it will not only raise interest rates here in the U.S. but it will raise interest rates in Europe as well and that will raise borrowing costs for so many of the EU's struggling countries. According to the IMF's latest report on the Eurozone, "Recovery remains elusive. Growth has weakened further and unemployment is still rising, and the risks of prolonged stagnation and inflation undershooting are high. Mounting social and political tensions pose an increasing threat to reform momentum." Fortunately for Europe the Federal Reserve is unlikely to tighten any time soon.

China

Headlines out of China slowed down last week but the one economic report we did get was bearish. The HSBC China flash PMI survey declined to an 11-month low at 47.7. Economists were hoping to see a rise from 48.2 to 48.6. Numbers below 50.0 indicate contraction. This further reinforces the worry that China is slowing down faster than many fear. Meanwhile China's leadership continues to adjust expectations for growth. This past week another leader was suggesting that China could see GDP growth of 7.0%. Officially the Chinese government's 2013 GDP target is 7.5%. Believe it or not but at +7.5% that is the slowest pace of growth for China in the last 23 years.

Major Indices:

The S&P 500 index slipped -0.03% last week. The index failed to breakout past resistance near 1700 and began to retreat midweek. Yet traders stepped in to buy the dip near short-term support in the 1680 area. Most of the S&P 500's momentum indicators on the daily chart are about to turn bearish but that's not surprising after its four-week rally. The question is can this large-cap index breakout past 1700 or is this a near-term top for the market? The answer to that question may be determined by key events this week. We have another Fed meeting, the GDP estimate, and the July jobs report coming up in the next five trading days. Any of these could be a market-moving event.

Technically the S&P 500 has short-term resistance at 1700 and short-term support at 1680. If the index can breakout then we're looking at likely resistance near 1720 and then 1740-1750. If the index contracts then look for support at 1680 (Friday's low was 1676) and it that level breaks then the 1655-1645 zone.

chart of the S&P 500 index:

The tech-heavy NASDAQ composite is holding up pretty well and managed a +0.7% gain last week. The index is at 13-year highs and after consolidating sideways the last few days the NASDAQ looks poised to breakout higher again. There is short-term resistance near 3625. Likely targets for overhead resistance is 3650 and 3700. On the other hand if the NASDAQ retreats there is short-term support near 3575. I would also expect potential support near the July 10th high near 3520 and more likely the 3500 mark.

chart of the NASDAQ Composite index:

The small cap Russell 2000 index tagged a new all-time high before reversing lower on Wednesday. Fortunately for the bulls there was no follow through on Wednesday's decline even though the index is overbought and due for a correction lower. If you look at the weekly chart (see below) the $RUT is near a significant trend line of resistance. Odds are good we are nearing another pullback but there is certainly no guarantee. If the $RUT were to retreat I would watch for potential support near 1020 and then the 1000 level.

chart of the Russell 2000 index

Weekly chart of the Russell 2000 index



Economic Data & Event Calendar

We have a very busy week for economic data. As I mentioned earlier the FOMC meeting's statement, the Q2 GDP estimate, and the jobs report could all be market moving events. The U.S. Q1 GDP growth was about +1.8%. Yet Q2 is expected to plunge into the +1.0% to +0.5% range. There are a few whisper numbers that are closer to +0.0% growth. Due to the drop in growth the Fed is unlikely to say anything that would rock the boat, not after the market's reaction to Bernanke's taper comments in May. Meanwhile economists are expecting +175,000 new jobs in July. That would be down from June's +195K. Anything less will probably be seen as more "bad news is good news" since it keeps the Fed on the sidelines. If there was a big surprise higher in jobs then it might be seen as bearish since strong job growth would mean the Fed is closer to tapering their QE program.

Economic and Event Calendar

- Monday, July 29 -
pending home sales data

- Tuesday, July 30 -
Case-Shiller 20-city home price index
Conference Board's Consumer Confidence for July
Two-day FOMC meeting begins
Eurozone consumer confidence
Eurozone CPI data

- Wednesday, July 31 -
ADP Employment Change report
U.S. Q2 GDP estimate
Chicago PMI data
Two-day FOMC meeting ends.
FOMC meeting interest rate decision
Eurozone unemployment rate
Chinese manufacturing PMI data

- Thursday, August 01 -
Weekly Initial Jobless Claims
ISM index
auto and truck sales for July
Eurozone PMI data
ECB interest rate decision

- Friday, August 02 -
unemployment rate
Non-farm payrolls (jobs) for July
factory orders
Eurozone PPI

Additional Events to be aware of:

September - U.S. debt ceiling deadline

The Week Ahead:

My crystal ball for the week is cloudy but I suspect there is a greater than 50% chance the market sees some profit taking in reaction to one of the events mentioned above (FOMC statement, Q2 GDP, or Jobs number). It could be a volatile week as stocks ricochet from event to event or it could be quiet as stocks churn sideways and then suddenly spiking one way or the other on one of the above catalysts.

We shouldn't fear a pullback here. Instead we can look at a pullback as a potential entry point for new positions. However, we should probably take a cautiously bullish stance instead of an aggressively bullish one. My biggest concern is another political battle in Washington this September. The U.S. has already hit its debt ceiling but due to creative financial accounting and extraordinary measures the government doesn't run into trouble until September.

We could be facing another government shutdown as democrats and republicans fight over the debt ceiling and the budget. Republicans do not want to raise the debt ceiling (but they will) and President Obama wants another $1.6 trillion in taxes to help pay for more government spending. It could prove to be another epic fight on capitol hill and too much uncertainty is usually bearish for stocks.

A few more warning signals that might make a bullish investor pause are the following: The price of gasoline is on the rise. The U.S. economy tends to roll over into recession when gas nears the $3.80-4.00 a gallon level (national average). We are starting to see a slowdown in consumer spending and it's showing up in restaurant sales, which have slowed to the worst pace in years. That might be due to the fact that average hourly pay has been dropping (and the rise in gas). Another worrisome sign was identified by Bank of America who said that institutional money managers were selling stocks in June at the fastest pace in history. At the same time the retail investor was buying stocks at the highest pace since 2011. Is this another classic case of "smart" money getting out at the top and selling to "dumb" money before the market rolls over?

Geopolitical risks remain. The Middle East continues to boil with violence in Syria, Libya and Egypt. This past week saw more headlines from Egypt about clashes between pro-Morsi, pro-Muslim Brotherhood supporters versus the police and the military. Reports say thousands have been injured and dozens of pro-Morsi supporters are dead. The Egyptian military claims that 30 million people have hit the streets in protests (again). That number includes both pro-Morsi and anti-Morsi supporters but it's still incredible when the entire population of Egypt is only 85 million. It feels like the country is slipping closer and closer to civil war.

Seasonally the months of August and September are two of the worst months of the year for stocks. It would make sense for the market to retreat lower over the next several weeks. This could prove to be a pivotal week for the market. Thus investors may not want to be in a rush to launch new positions at current levels.

James