It was another record-setting week for the U.S. stock market. The S&P 500 bucked the odds and extended its rally to seven weeks in a row. This is now the longest winning streak since May 2007. According to Morningstar the most recent estimates suggest that stock funds have garnered $172 billion in just the first ten months of 2013. That's the healthiest inflows since the year 2000 when stock funds surged with $272 billion inflows.

Equity buyers have been resilient. Last Monday we saw the market stumble thanks to cautious comments from billionaire investor Carl Icahn who expressed concerns that stocks could see a drop. Then on Wednesday the stock market shot lower after the FOMC minutes were released that afternoon. Worries that the Federal Reserve might taper their QE program sooner than expected resurfaced as Wall Street digested the minutes. Fortunately there was no follow through lower on the Wednesday afternoon drop. FYI: Did you know that this month marks five years of the Fed's QE program? The S&P 500 has come a long way from its 666 low in 2009. It's currently up +170%.

This past week set new records with the S&P 500 index crossing the 1800 level. The Dow Jones Industrial Average closed above the 16,000 mark for the first time. The small cap Russell 2000 also hit a new all-time high. Banks and biotechs were some of the market's best performers with +2.2% and +2.79% gains for the week, respectively. Another drop in the U.S. dollar did nothing to help precious metals. Silver lost -3.6% for the week and gold plunged -4.6%.

Economic Data

Once again the U.S. economic data was mixed. The Kansas Fed manufacturing survey rose from 6.0 in October to 7.0 in November. That's not super inspiring but we did see the new orders component surge from 3.0 to 15.0. The employment component reversed from -2.0 to +6.0. The numbers were less rosy in the Philadelphia survey. The Philly Fed index plunged from 19.8 in October to 6.5 in November, marking its lowest reading since May. Its new orders component declined from 27.5 to 11.8. The Philly's employment component dropped from 15.4 to 1.1.

The Fed certainly has breathing room on the inflation front since there doesn't appear to be any. The most recent data has inflation sitting at four-year lows. The latest wholesale look at inflation showed the Producer Price Index falling -0.2%. The core-PPI, which excludes more volatile food and energy prices, rose +0.2%. The PPI is only up +0.3% in the last twelve months. Inflation at the retail level remains tame as well with the Consumer Price Index falling -0.1% thanks to a -1.7% drop in energy prices. The core-CPI rose +0.1%. If these numbers continue the worry wont' be inflation but the possibility of deflation.

In positive economic news we saw the U.S. purchasing managers index rise t 54.2, which was above expectations. Business inventories in the U.S. rose from +0.4% in August to +0.6% in September. Monthly retail sales, not counting automobiles and gas, increased +0.5% in October following a +0.3% rise in September. This good news was countered with a -3.2% month-over-month drop in the existing home sales numbers. The pace of existing home sales fell from 5.29 million to an annual pace of 5.12 million in October.

Overseas Data

One of the big stories out of Europe this past week was talk that the European Central Bank (ECB) might consider the idea of a negative deposit rate. The region is worried about disinflation and they want to spur more bank lending. Some are floating the idea of a -0.1% deposit rate versus the current ECB rate of +0.25%. At the moment this is just talk but it's a reminder that Europe still has a lot of work to do to improve the health of their economy.

The manufacturing PMI data for the Eurozone improved from 51.3 to 51.5. Yet Eurozone services PMI slipped from 51.6 to 50.9. Numbers above 50.0 indicate growth but they're not growing very fast. There was a lot of economic data out of Germany last week. Germany's manufacturing PMI increased from 51.7 to 52.5, which was better than expected. Their wholesale inflation PPI data inched down -0.2%. The latest ZEW economic sentiment survey in Germany rose from 52.8 to 54.6. Germany said their GDP came in at +0.3% quarter over quarter. The year over year GDP number hit +1.1%. Elsewhere in Europe France said their manufacturing PMI fell from 49.1 to 47.8. In this case numbers below 50.0 indicate contraction. Another disturbing headline was news that Spain's household income had fallen -10% back to 2005 levels.

In Asia the Bank of Japan left its interest rate unchanged in the 0.0-to-0.1% range. There was good news with Japan's exports in October rising +18.6% year over year. Yet this was overshadowed by Japan's trade deficit hitting its worst levels on record thanks to surging energy imports. Meanwhile Japan's larger neighbor China saw its HSBC flash manufacturing PMI decline from 50.9 to 50.4. This was less than expected and moving the wrong way. Numbers above 50.0 indicate growth. Another worry is the surging Chinese real estate market. The latest data shows Chinese home prices rising almost +10% in just a month.

A bigger worry with China and Japan is the military escalation over some uninhabited islands south of Japan (near Taiwan). In Japan these islands are called the Senkakus. In China these islands are called the Diaoyus. The two nations have been sparring over these islands for months (actually years). The situation escalated with China announcing they would set up an air defense zone over the islands effective Saturady. According to one international news outlet China has warned Japan that if they shoot down any Chinese drones over the islands it would be considered "an act of war".

Major Indices:

The S&P 500 broke through the 1800 level for the first time this week. The index bounced off prior resistance near 1775 and rebounded to push through round-number resistance at 1800. Year to date the S&P 500 is now up +26.5%.

If stocks were to suddenly turn lower we can watch for support near 1775 and 1750. If the rally continues then the next likely resistance level is the 1820-1825 area. Beyond that we're looking at 1850.

chart of the S&P 500 index:

The NASDAQ composite dipped to its 30-dma before bouncing. That's twice this month we've seen the 30-dma act as support. The two-day rebound pushed the NASDAQ to a new 13-year closing high but it remains below round-number resistance at the 4,000 level. This index is up +32.2% for the year.

If the NASDAQ can breakout past 4,000, and we think it will, then the next likely resistance levels are 4,050 and 4,100. If stocks were to unexpectedly reverse lower then we can look for support near its 30-dma (currently about 3920) and probably the 3850 area.

chart of the NASDAQ Composite index:

The rally in the small caps is encouraging. A few weeks ago market pundits were concerned about the narrowing breadth of the market's rally. Strength in the small caps should alleviate those concerns. Thankfully the Russell 2000 has rebounded. This past week the $RUT gained +0.78% and closed at a new all-time high. The index looks poised for a rally toward the top of its bullish channel, currently in the 1160 area. Year to date the $RUT is up +32.4%.

chart of the Russell 2000 index



Economic Data & Event Calendar

It's another quiet week for economic data. The U.S. stock markets will be closed on Thursday for the Thanksgiving holiday. They close early on Friday at 1:00 p.m.

Economic and Event Calendar

- Monday, November 25 -
pending home sales data for October

- Tuesday, November 26 -
Consumer Confidence
Case-Shiller 20-city home price index
building permits and housing starts

- Wednesday, November 27 -
weekly MBA mortgage application data
Weekly Initial Jobless Claims
durable goods orders
Chicago PMI
University of Michigan consumer sentiment survey

- Thursday, November 28 -
Eurozone industrial production
Eurozone unemployment data
U.S. markets are closed for Thanksgiving holiday

- Friday, November 29 -
Chinese manufacturing PMI data
"Black Friday" for U.S. retailers
U.S. markets close early.

Additional Events to be aware of:

Dec. 17th - FOMC meeting & economic forecasts update
Dec. 17th - post-FOMC meeting Ben Bernanke press conference
Dec. 24th - U.S. stock market closes early
Dec. 25th - U.S. stock market closed for Christmas




Looking Ahead:

As we look ahead the issues I mentioned last week remain. The next budget battle in Washington could impact investor sentiment. The deadline for lawmakers to come up with a new budget is Friday, December 13th. Odds are they will not have a deal in time and all of the negative headlines have the potential to sour the stock market.

The next major issue will be the Federal Reserve taping their QE program. You saw how stocks dropped following the latest FOMC minutes on Wednesday afternoon on concerns that the taper could be here sooner than expected. Yet in reality we are not likely to see taper until the first quarter of 2014 or even later. The Fed knows that we could see another government shutdown in early 2014 as the democrats and republicans battle it out. While the last shutdown didn't have much of an impact on U.S. economic growth another one might just be one shutdown too many. Thus the Federal Reserve is unlikely to taper until after we see congress settle on a new budget and readdress the debt ceiling issue again, all of which will take place in the January-February timeframe.

We will need to face the taper eventually. Everyone expects the Fed to taper some time in 2014. There has been some speculation that stocks could see a -10% to -15% drop once the Feds do announce a reduction in their QE program. However, in spite of the odds of a sharp taper-induced correction most analysts are forecasting another up year for 2014. Analysts have started rolling out their 2014 yearend targets for the S&P 500 index and we're hearing numbers like 1840, 1900, even 2000 (actually the Goldman Sachs target was 2014 in 2014).

Another issue with the Fed's eventual taper will be its affect on treasury yields. The yield on the U.S. 10-year bond traded above 2.8% this past week. Quite honestly the chart of the 10-year yield seems to be forecasting a rise back toward the 3.0% area. The current 52-week high was 2.979% on September 5th. Many are worried that a 3.0% yield is a line in the sand for the markets. At 3.0% or higher the yield on bonds may be too tempting for money managers to resist and it could pull money out of equities and back into bonds, at least that is the theory. The taper issue could come down to perspective. If the market chooses to interpret the Fed tapering their QE program because the U.S. economy is healthy again then maybe any taper correction will be short lived.

Looking at the next couple of weeks the trend should remain higher. Historically the week after Black Friday is up and has been up seven out of the last seven years. December is also a seasonally strong time period for stocks. The Stock Trader's Almanac lists December as the best month of the year for the S&P 500, the Russell 2000, and the second best month of the year for the NASDAQ and has been this way for decades.

Next week the financial media will likely focus on retailers and the impact for "Black Friday" and "Cyber Monday". The sentiment for retailers seems to have soured a bit in recent days. Analysts are worried that this could be one of the worst holiday shopping seasons in years. They will be analyzing the Black Friday traffic trends for any insight into this year's consumer spending. This is probably all noise for the market. Technically stocks are breaking out and the market's major indices are poised to keep climbing. I saw an interesting tidbit this weekend. In the last 22 years the S&P 500 has rallied +20% or more in a year seven times. Every time the market was higher the next year.

Don't forget that the U.S. stock market will be closed on Thursday for Thanksgiving and they close early at 1:00 p.m. on Friday.

Have a wonderful Thanksgiving. We have much to be thankful for!

James