Federal Reserve Chairman Ben Bernanke surprised the market with no QE taper on Wednesday. The U.S. market soared on this decision and Wednesday afternoon saw the S&P 500 hit new all-time highs near 1,725. Thus far the first nine-months of 2013 have been stellar. The S&P 500 has delivered its eighth best performance since 1957. According to Bank of America/Merrill Lynch the most recent data shows the largest weekly inflow of money into the global stock market ever! Money flowing into U.S. equity funds hit their highest weekly inflow since the year 2000. While that seems like good news contrarians will point out that money inflows tend to surge at market peaks.

Unfortunately the post-FOMC meeting spike higher is fading. The Dow Jones Industrial Average has already erased its post-Fed meeting gains. The S&P 500 is close to erasing its gains with a Thursday-Friday pullback. Friday was a high-volume day thanks to the S&P 500's quarterly rebalancing. Plus, the Dow Jones Industrials removed HPQ, BAC and AA and replaced them with GS, V, and NKE. Friday was also a quadruple-witching option expiration Friday. Stock options, index options, futures, and single stock futures all expired. For the week the Dow Industrials gained +0.49%. The S&P 500 added +1.3%. The NASDAQ was up +1.4%. The Russell 2000 surged +1.79%. Transports had a good week with a +2.59% gain. Meanwhile commodities retreated. Normally when the U.S. dollar declines, like it did last week, commodities rise. That relationship didn't work as crude oil sank -3.49%, silver lost -2.2%, and gold gave up -0.1% for the week.

Economic Data

There was a lot of housing-related data last week. Existing home sales for August surged to an annual pace of 5.48 million. That's up from July's 5.39 million. August was the strongest pace since February 2007 (5.79 million). I wouldn't get too excited just yet. The recent rise in mortgage rates likely pushed buyers to rush in and close a deal. This may have pulled sales forward and could spell trouble for the rest of fall.

Homebuilders remain optimistic. The latest NAHD homebuilder sentiment survey remained unchanged at 58. These are eight-year highs. While builders are positive the housing starts and permit data was mixed. Housing starts for August rose +0.9% to an annual rate of 891,000. That's up from July's 883K. Building permits fell -3.8% to 918,000.

After a multi-week plunge in mortgage applications the MBA mortgage index finally bounced. Last week the mortgage index gained +11.2%. This was fueled by a +17.9% rebound in refinance applications. Applications to purchase a home only rose +2.5%.

Inflation remains tame with the Consumer Price Index (CPI) data for August coming in at +0.1%. The core CPI also rose just +0.1%. Over the last year the CPI is only up +1.5%.

The latest round of regional Fed surveys were mixed. The New York Empire State fed survey declined from 8.2 to 6.3. Economists were hoping for a rise to 9.1. Readings above zero are positive. The Philly Fed manufacturing survey saw a big improvement from 9.3 in August to 22.3 in September. That's the highest reading since March 2011.

The biggest economic event for the week was the two-day FOMC meeting. Most of the market was expecting Ben Bernanke to announce a $10 billion taper in the Fed's QE program. Yet the Fed said no taper due to not enough positive economic data and tightening of financial conditions (a rising 10-year bond yield). Bernanke expressed concerns over fiscal uncertainty (U.S. budget debate and debt ceiling) and worried over the unemployment picture that has only improved due to people leaving the workforce. The Fed's QE program remains unchanged at $85 billion a month in asset purchases that's split between $45 billion in U.S. treasuries and $40 billion in mortgage-backed securities.

It is worth noting that the Federal Reserve also downgraded their economic forecast for 2013 and 2014. They now expected 2013 GDP growth in the 2.0% to 2.3% range and they expected 2014 GDP growth in the 2.9% to 3.1% zone. Essentially the Fed is on hold as they await more data. At least that was the initial impression. The stock market shuddered a bit in confusion when St. Louis Fed President James Bullard came out on Friday and suggested the Fed might taper at the October meeting. That was a surprise since many had assumed that after Wednesday's announcement the next time table for the Fed to taper would be the December or January meetings.

Overseas Data

Overseas data was quiet. The markets are waiting for Germany's national elections that take place on Sunday, September 22nd. It has been widely expected that German Chancellor Angela Merkel would win reelection again. Yet her lead has steadily diminished in recent days. There are a lot of Germans upset over the constant bailouts for weaker Eurozone members. Greece has been a sore subject as it's widely expected that Greece will need yet another bailout. It's probably not a coincidence that the next IMF review of Greece is scheduled for September 29th, after the German elections.

As of Saturday it looked like Merkel's lead had dwindled to a statistical dead heat with her rival. Yet as of Sunday afternoon (Sunday evening in Germany) Merkel had won a decisive victory. She will become the fourth German chancellor to ever win a third term since World War II. The global markets could rally on Monday based on this news.

Major Indices:

The S&P 500 hit new all-time highs this past week as market participants reacted to the "no taper" news. Yet after a three-week rally from the 1630 level the S&P 500 looks a little tired here. It might be time for a pullback.

The 1700 level could offer some short-term support. If that level fails then 1680 is the next likely target. On the other hand if stocks resume the rally on Monday then 1730 and 1750 are the next potential resistance levels.

chart of the S&P 500 index:

The NASDAQ has been showing relative strength. The composite index added +1.4% last week and hit new 13-year highs. The rally paused at round-number resistance at the 3800 level. It's possible that the NASDAQ might find short-term support at 3750 or 3735 but I would focus on the 3700 level. Below 3700 we're looking at potential support near the 50-dma and the 3600 area.

chart of the NASDAQ Composite index:

The small cap Russell 2000 index closed at new all-time highs on Tuesday and the rally kept going with the post-FOMC meeting surge. The index finally found resistance at the 1080 level. If the rally continues then 1100 is the next logical (and psychological) target. If we see stocks retreat then the $RUT should find some support near 1060 and the 1040 levels.

chart of the Russell 2000 index



Economic Data & Event Calendar

There are a number of economic reports out this week. Yet they will all pale in comparison to the German elections taking place on Sunday, Sept. 22nd and the budget battle out of Washington D.C. As mentioned above, Merkel has won another term, which will help remove some uncertainty from the market. The next big deadline to watch is the September 30th/October 1st U.S. budget deadline. Officially the U.S. government faces a shutdown on October 1st. Yet the U.S. Treasury department says they can keep the government going until October 9th. The Treasury has been operating under "special rules" and creative accounting techniques for the last several weeks as they juggle accounts payable and postpone bills that they can pay later.

Economic and Event Calendar

- Monday, September 23 -
Eurozone PMI data

- Tuesday, September 24 -
Case-Shiller 20-city home price index
Consumer Confidence data

- Wednesday, September 25 -
MBA mortgage index
Durable Goods orders
new home sales data

- Thursday, September 26 -
Weekly Initial Jobless Claims
Japan's CPI data
U.S. Q2 GDP growth estimate
pending home sales data

- Friday, September 27 -
Eurozone's consumer confidence data
Eurozone industrial production
personal income and spending data
University of Michigan consumer sentiment (final reading for Sept.)

Additional Events to be aware of:

Oct. 1st: U.S. government shutdown deadline
Oct. 29-30th: next (two-day) FOMC meeting

The Week Ahead:

As we look ahead the stock market is facing a lot of cross winds. The Fed's decision to not taper could be considered bullish since it keeps the stimulus going. At the same time you could argue it's bearish since that means the Fed does not believe the U.S. economy is strong enough to survive without help from the central bank. The stock market did not like Fed President Bullard's comments on Friday that they could choose to taper in October. Thus the markets still face the uncertainty of taper and the when and how it might occur. Unfortunately, the stock market doesn't like uncertainty.

Speaking of uncertainty there is no clarity on the U.S. budget battle and debt ceiling debate. Actually, that's probably not true. The only clarity we have is that both sides are gearing up for a venomous fight with headlines that could sicken the stock market. Investors might choose to hit the sell button ahead of any looming government shutdown and then wait for the dust to settle.

President Obama has said multiple times that he will not negotiate over the debt ceiling. Meanwhile the Republican controlled congress is sending U.S. budgets to the Senate that defund Obamacare and there's no chance those are going to pass the senate (and Obama has already promised to veto any bill that defunds Obamacare). With major budget deadlines set for October 1st and most likely October 9th the rhetoric in Washington is going to heat up fast. We only have six trading days left until October 1st.

Since we're looking at the end of the month it also happens to be the end of the third quarter. Normally you might expect the stock market to see some end of quarter window dressing. Yet after +20% gains in 2013 fund managers might be facing a temptation to lock in gains now before the battle in Washington gets too hot and sours investor sentiment. It's also worth noting that the last week of September is historically one of the worst weeks of the year for stocks. We are also less than three weeks away from the unofficial start to the Q3 earnings season. The next couple of weeks could be punctuated by earnings warnings, which could also lessen investor appetite for stocks.

Put it all together and we have a recipe that favors a market pullback. Longer-term (next several months) the general tone seems to be bullish for the market. Yet short-term there is so much uncertainty we could see a buyer strike as investors wait to see how the politics in Washington unfold. I would not be in a rush to launch new positions if we could see a better entry point in mid October.

Investors should buckle their seatbelt. The next couple of weeks could be bumpy.

James