September's seasonal sting is slipping. The U.S. stock market is up two weeks in a row in what is historically the worst month of the year for equities. Thursday, September 12th was the S&P 500's first decline in September, snapping a seven-day winning streak. Meanwhile the NASDAQ composite rallied to new 13-year highs thanks to a strong Monday-Tuesday performance.

Market participants kept a wary eye on the Syria situation but a U.S. strike on Syria seems to be fading away. Lessened Syria fears combined with better than expected economic data out of China helped power stocks to one of their strongest weeks this year. Precious metals like gold and silver crumbled as geopolitical risks receded. Meanwhile the Dow Jones Industrial average added +3.0% for the week (more than 450 points). The S&P 500 added +1.98%, the NASDAQ added +1.7%, the Russell 2000 index added +2.3%. Some of the best performing industries were the transports (+2.39%), the semiconductors (+2.7%), and the housing industry (+4.1%).

Economic Data

Most of the U.S. economic data was disappointing last week. The University of Michigan consumer sentiment produced one of its biggest misses on record. Analysts were expecting a reading of 83.0 but the September reading fell from 82.1 to 76.8. That's the lowest reading in months. The expectations component is plunging with a drop from 73.7 to 67.2.

U.S. retail sales data also fell to its weakest reading in months. The headline number came in at +0.2% compared to estimates for +0.5%. Ex-autos the retail sales gain was only +0.1%. Clothing and accessories fell -0.8%, sporting goods -0.5% and general merchandise -0.2%. The Producer Price Index (PPI) rose from a +0.0% gain in July to +0.3% in August. The core-PPI rate of wholesale inflation slipped to 0.0% from +0.1% in July.

Meanwhile mortgage applications continue to plunge. The weekly MBA mortgage index dropped -13.5% to is lowest levels in almost five years. Refinance applications cratered -20%.

Overseas Data

The trend overseas continues with weak data out of Europe and improving data out of Asia. Eurozone industrial production fell from +0.6% to -1.5%, month over month. French industrial production dropped -0.6%. Italy's industrial production slipped -1.1% compared to a prior reading of +0.2%. Italy also sad its GDP was revised lower from -0.2% to -0.3%. Meanwhile unemployment in Greece hit a new all-time high of 27.9%, up from 27.6%.

It was a different story in Asia. Japan said their industrial production rose +3.4%, up from +3.2%. Japan's second-quarter GDP estimate was revised higher from +0.6% growth to +0.9%. The Japanese government raised their economic forecasts for the seventh time this year. It was data out of China that helped drive market gains. China said its pace of retail sales rose +13.4%, which was above expectations. Exports increased +7.2%, which was also above expectations. Plus China's industrial production surged +10.4%, again better than expected.

Syria

Syria remains a major topic for the market but its impact seems to be fading. There has been significant changes in the last week with Russia proposing that Syria hand over its chemical weapons the day before President Obama was due to speak to the U.S. public (last Tuesday night). Initially Russia's proposal was met with skepticism but Syria President Assad appears to be playing along. President Obama says a military strike on Syria could still happen but the U.S. is willing to try the diplomatic route first. This could just be a huge delaying tactic by Syria and Russia. The logistics and details for the international community to be able to catalog and transport Syria's weapons of mass destruction out of the country during a civil war could be daunting. As of Saturday, September 14th, it appeared that the U.S. and Russia had agreed to an initial plan on how to proceed. This news could provide a boost to stock markets around the world on Monday morning.

Major Indices:

The S&P 500 large cap index has delivered a very strong September performance with gains in eight out of the last nine sessions. For the week the S&P 500 is up +1.98% and back above its simple 50-dma. This index is also back above what could have been resistance at the 1680 level. It's now only 22 points away from a new all-time high.

The early August high near 1709-1710 is the next level of overhead resistance. A breakout there could spark new short covering. A failure there and it could look like a potential bearish double top pattern. Should stocks retreat lower we can watch for support near 1650 and the long-term up trend of higher lows.

chart of the S&P 500 index:

The NASDAQ composite had a good week with a +1.7% gain and a breakout to new 13-year highs. This tech-heavy index has spent the last five weeks churning sideways in the 3570-3700 zone. The push to new highs this past week is very bullish. The NASDAQ probably would have seen stronger gains but a sell-off in Apple Inc. (AAPL) undermined its advance.

There is very short-term support at 3700. If the NASDAQ were to reverse we can watch for potential support near 3640 or its 50-dma (currently 3625). Overhead resistance is probably 3750 and the 3800 level.

chart of the NASDAQ Composite index:

The small cap Russell 2000 index outperformed the NASDAQ and S&P 500 with a +2.3% gain. Yet the rally has appeared to stall under its August highs. A reversal near the early August peak would look like a potential bearish double top.

On a short-term basis the $RUT should find support near 1040. If that level fails then look for support in the 1010 area.

chart of the Russell 2000 index



Economic Data & Event Calendar

This week will see an uptick in economic data. Yet the only event that really matters is the two-day FOMC meeting. The FOMC meeting will end on Wednesday, September 18th. The Fed will release their decision on interest rates (no change is expected). Plus the Fed will update their economic projections. Federal Reserve Chairman Ben Bernanke will follow that with a press conference.

There are two distinct camps on Wall Street: those who think the Fed will announce a taper to their QE program on Wednesday and those who don't. The Fed has long said that any decision to scale back their QE program would be data dependent and so far the data has not been supportive of any taper. Yet a number of "insiders" and analysts have suggested that the Fed is looking for any excuse to begin the taper.

Whether the Fed does or does not taper on Wednesday will help set the tone for the rest of September. If they do announce a taper, many have speculated that the Fed will reduce their monthly QE program by $10 billion. That number has likely been priced into the market. Anything more might spark a bigger reaction in stocks. If they do not taper then that might suggest the Fed is still worried that the economy is not strong enough to stand on its own and could be viewed as bearish even though in the past anything that keeps the QE program going has been a bullish catalyst for stocks.

The Federal Reserve might choose some combination of taper now and then follow that up with dovish comments from Bernanke at the press conference or vice versa and not taper but follow that up with hawkish comments in the press conference. Now that the Syria issue is fading from the spotlight the taper question will retake center stage for Wall Street.

Economic and Event Calendar

- Monday, September 16 -
New York Empire State manufacturing survey
industrial production data
Eurozone CPI data

- Tuesday, September 17 -
Consumer Price Index (CPI) data

- Wednesday, September 18 -
housing starts and building permit data
FOMC meeting & interest rate decision
Fed Chairman Bernanke press conference

- Thursday, September 19 -
Weekly Initial Jobless Claims
existing home sales data
Philadelphia fed survey

- Friday, September 20 -
Eurozone consumer confidence data

Additional Events to be aware of:

Sept. 22nd - German elections
September - U.S. debt ceiling deadline

The Week Ahead:

Following my QE taper comments above there are a number of other headlines that could move stocks. Obviously the Syria issue could sour if Syrian President Assad decides to stop cooperating. That seems unlikely over the next few weeks. That leaves the U.S. budget battle and U.S. debt ceiling as major issues that could derail the stock market's rally.

The deadline for the U.S. budget showdown is October 1st. That is just a little more than two weeks away and any there doesn't seem to be any deal on the table for the democrats and republicans to rally behind. If the two parties can't come together on a deal then the U.S. government officially shuts down on October 1st. You can bet that the politicians in Washington will wait until the very last minute before agreeing to some sort of deal or postponing the decision again with a temporary stop-gap measure. Unfortunately, all the uncertainty surrounding this issue could be negative for stocks.

Looking beyond the U.S. another major story will be German national elections on September 22nd. German chancellor Angela Merkel is still expected to win but her margin of victory seems to be narrowing. Should Merkel lose it could cause some serious shockwaves in the equity markets. Even if Merkel wins again the financial crisis with Greece will rear its ugly head again. Greece will need an additional bailout and Italy, Spain and Portugal are all on the brink again. There has been new speculation that after the German elections the EU leaders may consider a "smaller" EU with few members. This could be an issue that plagues the market for months to come.

The U.S. stock market's trend is still higher. To keep things simple, the trend is our friend. Yet I am still worried that the next two or three weeks could still be a roller coaster for stocks due to the QE taper, U.S. budget battles, and German elections.

James