The stock market ended 2013 like fireworks - bright and loud. Stocks ended the year at their highs and immediately suffered a hangover the next trading day on Thursday, January 2nd. Normally the first day of January tends to be up and Thursday was the first time in five years that the first day of trading was down. That caught everyone's attention. An old market maxim says that so goes January so goes the year. That's because 73% of the time, over the last 85 years, that market maxim has been correct. There is another January indicator that narrows it down from the entire month to just the first five days. The next three days could impact trader sentiment.

Thus far 2014 is off to a shaky start. As I mentioned earlier the big sell off on Thursday was a surprise. The best explanation I heard was investors were selling their winners to lock in gains and postpone the tax consequences into 2015. Normally you would think of tax selling in December but that's to sell your losers before yearend. Thursday's weakness was mostly investors selling their winners. 2013 was definitely a winner and was only the tenth year in history that the S&P 500 index never closed negative for the year? 2014 has already blown its chance to repeat that feat. The S&P 500 is off -0.9% year to date. The NASDAQ composite is off -1.0% and the small cap Russell 2000 index is down -0.65% year to date. Meanwhile gold, which had a terrible year in 2013, is bouncing and up +2.69% in 2014. Thus far big banks and airline stocks have been strong performers in 2014 as well.

Economic Data

Most of the economic data last week was positive. The ISM index saw its December reading hit 57.0, which marked seven months of positive readings in a row (numbers above 50.0 are positive). Construction spending in the U.S. hit its highest levels since 2009 with a +1.0% rise in November. Consumer confidence came in better than expected with a rise from 72.0 to 78.1. The New York ISM data came in positive for the fifth month in a row with a rise from 608.5 to 615.4. Unfortunately the Chicago PMI dropped from 63.0 to 59.1, which was worse than expected. We also saw the pace of vehicle sales in December slow from 16.4 million to 15.4 million, which is pretty dramatic. We shouldn't be too concerned since total sales in 2013 hit 15.6 million, the strongest pace since 2007.

Overseas Data

Economic data overseas was mixed with most good news out of Europe and bad news out of Asia. Germany, Italy, and Spain all saw their manufacturing PMI data improve and all of them were in positive territory above 50.0. France was the standout decliner with French manufacturing PMI falling from 47.1 to 47.0. Altogether the Eurozone saw its manufacturing PMI stay unchanged at 52.7. Numbers above 50.0 are positive. In other news we saw Latvia enter the Eurozone bumping the number of countries sharing the Euro currency to 18. Latvia is a northeastern European country sandwiched between Lithuania and Estonia.

China was used as another excuse to sell thanks to weak economic data. Chinese manufacturing PMI data fell from 51.4 to 51.0. Their non-manufacturing PMI data slipped from 56.0 in November to 54.6 in December. The market is worried because the Chinese economy seems to be slowing down and hitting growth levels not seen since the year 1999.

Major Indices:

The S&P 500 index closed 2013 at new all-time highs at 1848. Since then it has seen a minor drop toward short-term technical support at its rising 10-dma. If this pullback continues then the S&P 500 could slide toward support in the 1800-1810 area. There has been concern that the market could see a -3% to -5% correction. If that were to occur it would mean a drop into the 1790-1755 zone for the S&P 500. If we see the S&P 500 breakdown below 1800 I would not be surprised to see a drop toward support near 1775.

chart of the S&P 500 index:

The NASDAQ composite ended 2013 at new 13-year highs at 4,176. It too has since dipped toward its simple 10-dma. If this pullback continues the next likely support levels appear to be the 4070 level and the 4000 level or possibly the 50-dma (near 4000).

chart of the NASDAQ Composite index:



The small cap Russell 2000 index ($RUT) ended 2013 at an all-time closing high (1,163). Like its big cap rivals the $RUT has also dipped to its simple 10-dma. If this pullback continues the 1135-1140 zone might offer some support but I would bet on a dip closer to its trend line of higher lows near 1120. If 1120 fails then we're looking at a drop to 1100 and the bottom edge of its long-term bullish channel.

chart of the Russell 2000 index



Economic Data & Event Calendar

It is the first full week of a new month and that means lots of economic data. Janet Yellen is expected to be confirmed as the next Federal Reserve Chairman on Monday. The ECB will announce its next interest rate decision on Thursday but no one expects any changes from the ECB. Thus the potential market moving event is Friday's nonfarm payrolls (jobs) report. Last month the jobs report came in at +203,000 and this number is expected to be revised higher. The estimate for December is currently about +195,000 but that could vary wildly based on the pace of temporary workers hired for the holidays.

Economic and Event Calendar

- Monday, January 06 -
factor orders data from November
ISM Services for December
Eurozone services PMI data
Janet Yellen confirmation as Fed Chairman

- Tuesday, January 07 -
Eurozone unemployment data

- Wednesday, January 08 -
ADP Employment Change report (private payrolls)
FOMC Minutes from December meeting
Eurozone retail sales data

- Thursday, January 09 -
Weekly Initial Jobless Claims
Chinese industrial production numbers
European Central Bank (ECB) interest rate decision

- Friday, January 10 -
wholesale inventory data from November
nonfarm payrolls jobs report for December
unemployment rate from December

Additional Events to be aware of:

Jan. 20th - stock market closed for Martin Luther King day
Jan. 28th - President Obama's state of the union address
Jan. 29th - FOMC policy update
Feb. 7th - U.S. debt ceiling is reached




Looking Ahead:

On a short-term basis we could see tech stocks and anything related to personal electronics get a boost thanks to the Consumer Electronics Show (CES) in Vegas this week. The CES will last from January 7th through the 10th and we'll be hearing about lots of goodies due to be launched in 2014.

Market technicians will be focused on the first five days of January. Normally traders expect an upward bias for stocks as fund managers put new money to work. Unfortunately not everyone is bullish for January. Long-time market veteran Art Cashin, who still works the floor of the NYSE, said we could see a -3% to -5% pullback in January. If that's true I would expect it the decline to start once earnings season begins. Alcoa (AA) kicks off earnings season on January 9th but it will be the next week that earnings season really picks up speed. Corporate guidance could play a major role in setting the tone for the first quarter of 2014.

Looking further out into the new year we have Sam Stovall, an analyst with S&P, who pointed out that mid-term election years tend to be more volatile for the market. He said we should expect a higher than normal chance of -5% declines this year. Normally the market sees a correction at least once every 18 months. Thus far we've made it 27 months so we're definitely due for one.

Over the last few weeks I have pointed out multiple warning signals that the market could be near a top and due for a significant pullback. However, we all know that the market can remain overbought a lot longer than what we might think is normal. If I had to pick a time period for the market to see a decline it would be the last three weeks of January as investors react to earnings news. Of course there is a chance that earnings results come in better than expected and actually renew the rally.

James