The stock market's upward momentum stalled last week in spite of a parade of better than expected economic data. The jobs report was significantly better than expected and the U.S. Q3 GDP estimate blew past estimates. Stocks plunged on Thursday on fears that stronger economic data might lead the Federal Reserve to taper their QE program sooner than expected. Yet there was no follow through on the sell off and the market rebounded quickly.

Economic Data

The October reading for the ISM services index (non manufacturing) improved from 54.4 to 55.5. Numbers above 50.0 indicate growth. One of the few negative economic data points last week was the sentiment number. The University of Michigan Consumer Sentiment survey fell from 73.2 in October to 72.0 in November. Analysts had been expecting a rise toward 75.0. October's reading is a two-year low.

The first look at U.S. Q3 GDP growth was a shocker on Thursday. Economists were expecting +2.0% growth. Yet the government said the country's GDP surged to a +2.8% pace. Unfortunately the rise in business activity was not due to stronger consumer spending or business investment. Instead the move appeared to be a reflection of rising inventories. That's not a good sign. Rising inventories might suggest a struggling consumer. Speaking of consumers, consumer spending rose at its slowest pace in three years.

The non-farm payrolls (jobs) report for October was another big surprise. Wall Street was only expecting +120,000 new jobs. The BLS reported +204,000 with 212,000 of that in new private sector jobs (the government lost jobs). The September jobs number was revised higher from +148K to +163K and the August number was revised to +238K, a +45K jump. Unfortunately the unemployment rate ticked higher from 7.2% in September to 7.3% in October. The labor force participation rate dropped from 63.2% to 62.8%, a new 35-year low.

Overseas Data

Most of the data overseas was positive. China's official non-manufacturing PMI data rose from 55.4 to 56.3, a new 14-month high. The HSBC China services PMI inched up from 52.4 to 52.6. Numbers above 50.0 indicate growth. There were a number of data points out of Europe. Germany's manufacturing PMI rose from 51.0 to 51.7. That helped fuel a Eurozone manufacturing PMI number of 51.3. Germany also said their factor orders in September surged +3.3%, well above expectations. Eurozone services PMI advanced from 50.9 to 51.6, which was better than expected.

There was some concern over retail sales, which fell -0.6% month over month for the Eurozone area. The Eurozone Producer Price Index (PPI) rose +0.1%, which was below expectations and helped fuel fears of deflation. It was deflation concerns that sparked the European Central Bank (ECB) to cut its main interest rate from 0.5% to a new record low of 0.25%. In other news Standard & Poor's downgrade France's credit rating from "AA+" to "AA".

Major Indices:

The S&P 500 index delivered a +1.34% bounce on Friday. That lifted its gain for the week to +0.5%. This large-cap index is now up five weeks in a row. It's currently up +24.2% year to date, which marks the index's fifth best performance from January through October in the history of the index.

Thursday's session looked like an ugly bearish reversal lower but there was no follow through. The 1775 level remains overhead resistance. If the S&P 500 can breakout past this level then the 1800 mark becomes the next likely target and resistance level. If stocks reverse lower again I would look for support near 1730 and 1700.

chart of the S&P 500 index:

The NASDAQ composite index produced an even uglier drop on Thursday with a breakdown below the 3900 level. Friday saw a big bounce and a move back above 3900 but Friday's session was an "inside day". That means Thursday's potential bearish reversal has not been canceled yet.

The 3960 area remains overhead resistance and if the NASDAQ can breakout then I would expect the 4,000 mark to act as both a magnet and a resistance level for the index. If the NASDAQ rolls over then look for support near 3800 and its simple 50-dma. Year to date the NASDAQ is up +29.8%. If we could end the year right here it would be a very successful year.

chart of the NASDAQ Composite index:

The small cap Russell 2000 index managed to eke out +0.39% gain for the week thanks to a big +1.9% bounce on Friday. On a short-term basis the $RUT seems to be forming a bearish trend of lower highs and lower lows over the last couple of weeks. Yet this is taking place within the $RUT's larger and longer-term bullish channel.

The index bounced right were it was support to near support in the 1080 area and its 50-dma. If this bounce fails then we can expect a drop toward the bottom of the bullish channel, currently near 1060. Year to date the $RUT is up +29.5%.

chart of the Russell 2000 index

Weekly chart of the Russell 2000 index



Economic Data & Event Calendar

The pace of economic data slows down considerably this week. I don't see anything that will be a real market mover. Q3 earnings are all but over but there will be a few stragglers.

Economic and Event Calendar

- Monday, November 11 -
(nothing significant)

- Tuesday, November 12 -
(nothing significant)

- Wednesday, November 13 -
weekly MBA mortgage application index
import/export prices
Japan's GDP estimate

- Thursday, November 14 -
Weekly Initial Jobless Claims
Eurozone GDP estimate

- Friday, November 15 -
New York Empire State Fed survey
U.S. industrial production data
wholesale inventory data

Additional Events to be aware of:

Nov. 20th - FOMC minutes from the last meeting.
Nov. 28th - U.S. markets are closed for Thanksgiving holiday
Nov. 29th - U.S. markets close early.




The Week Ahead:

It's hard to say what the week ahead will bring. All of the major U.S. indices produced big bounces on Friday. Yet some of these bounces were "inside days" where Friday's trading took place inside of Thursday's range. That does not negate Thursday's potential sell signal. It is noteworthy that the Dow Industrials managed to rally and close at a new all-time high on Friday. I do believe the path of least resistance is up for the market but that doesn't mean we can't see a two or three week correction before resuming the up trend.

Looking farther ahead there are some concerns about 2014. An analyst at Nomura Securities was making headlines on Friday with their research report sharing their opinion that stocks could see a -25% to -50% correction in the second half of 2014 (and into 2015). Another concern is the record high margin debt that investors have racked up. If stocks actually see a real correction lower it could be very fast and sharp since investors with borrowed money are going to be quick to try and sell and limit losses. Yet another worry is investor sentiment. The latest AAII investor survey is overwhelmingly bullish. Plus, equity allocations from the retail investor have hit 6-year highs. Money flowing into ETFs and stock funds has hit their highest levels since the tech bubble of the year 2000. These are contrarian indicators that the market is getting frothy and could be near a top.

Odds are really good that the U.S. markets are going to close 2013 in positive territory. If that happens the market will have notched a five-year winning streak, which is very rare. According to Yale University's Professor Shiller there has only been one time that the market rallied six years in a row. That was over 100 years ago. Historically the odds of the market being up in 2014 are not good.

I would not get too concerned just yet. Just because stocks are acting a little top heavy doesn't mean the market can't extend their gains. Looking at the past suggests that 2013's rally isn't over yet. Currently the S&P 500 is up +24% for the year. History says that when the index is up more than +10% in the first ten months of the year (through October) then the last two months of the year will see a rise of +4.5% over the last two months of the year. Granted those are averages and there are exceptions to this rule but it does put things in the bull's favor.

The wild card for the market is probably the Fed's QE taper issue. Previously investors were growing pretty comfortable with the idea that any reduction in the Fed's QE program might not happen until Q2 of 2014. Yet now with a rush of improving economic data the odds of the taper happening sooner than that just increased. How the market chooses to interpret this issue will impact market direction. More importantly if the Fed is going to taper because the economy is improving then investors could choose to focus on the improving economy as a new catalyst to buy stocks instead of the taper as a catalyst to sell stocks.

James