The month of February is historically the second-worst performing month of the year for the Dow Jones Industrial Average. Over the last 40 plus years whenever the S&P 500 ended the month of January with losses the losses carried over into February 72% of the time with an average decline of -2.4%. The S&P 500 almost achieved that loss on Monday, Feb. 3rd with a -2.3% plunge, making it the index's worst start to the month since 1933. The Dow Industrials plunged -326 points on Monday (-2.1%) making it the Industrials' worst start to February since 1983.

Disappointing economic data and worries about a slowdown in China combined with fears over emerging market losses all conspired together to spark the Monday (and Tuesday morning) sell-off in stocks. Investors have been yanking money out of stocks, at least up until February 5th. Outflows from U.S. equity funds surged to a record-breaking $24 billion last week. Year to date equity outflows have hit $28 billion. We've only seen five weeks of 2014 and already equity outflows from emerging market funds have surpassed all of 2013 with investors pulling out $18.6 billion in 2014 versus $15.2 billion in 2013, according to EPFR. Citigroup says that investors have been pulling money out of emerging market equity funds for 15 weeks in a row.

In spite of big losses on Monday all of the major U.S. stock indices managed to close in positive territory for the week with the exception of the small cap Russell 2000, which couldn't overcome the -3.1% plunge from Monday's drop and closed down -1.2% for the week. Most of 2014 has seen money flow out of stocks and into bonds. The yield on the 10-year bond closed at 2.58% on Monday. Since then bonds have retreated as equities bounced. The current pullback in bonds ends a four-week rally. Meanwhile commodities were on the rise last week with crude oil up +2.6% and back above $100 a barrel. Gold added +1.9% for its best weekly performance in a month. Gold futures look poised to breakout past potential resistance near the $1,270 an ounce level. Silver prices surged +4.5% for its best one-week gain in six months.

Economic Data

It was the start of a new month and the market digested a lot of economic data. The ISM manufacturing index delivered a disappointing January read of 51.3, down from 56.6. This is the lowest reading since June 2013. Numbers below 50.0 indicate contraction. The non-manufacturing ISM rose from 53.0 to 54.0, which was slightly above expectations for a rise to 53.7. Factory orders fell -1.5%, which matched a downwardly revised -1.5% from the previous month (November). The ADP National Employment Report said private payrolls increased +175,000 in January. That's down from December's report, which was adjusted lower from 238K to 227K.

The big report everyone was looking for was Friday's nonfarm payrolls (jobs) report. Economists were expecting between +175,000 to +189,000 new jobs in January. Unfortunately Friday's jobs number came in at +113,000. That's a huge miss and follows the prior month's disastrous report of just 75,000, revised up from 74,000. Together the December and January reports marked the worst two-month job growth in over three years.

BLS Jobs Data

Image from: CNNMoney

Many were quick to blame the unusually cold weather on the disappointing jobs number. That's the excuse used to explain December's missing jobs. While January was cold we did not see a drop in jobs that should have been impacted by weather, like construction jobs. As a matter of fact, the construction sector added +48,000 jobs. Last year the monthly average job growth was +194,000. The recent two-month plunge has pulled the three-month average down to +143,000. Don't forget that the U.S. needs about +150K new jobs a month just to keep up with new graduates and immigration.

The unemployment rate made headlines with an unexpected -0.1% drop to 6.6%. That's because recent unemployment declines have been due to falling labor participation rates. Yet the newest data shows the labor participation rate actually went up from a 35-year low of 62.8% to 63.0%. Friday's report garnered the usual adjectives like "weak" and "disappointing" but I'm starting to hear more comments like "irrelevant". The U.S. government Bureau of Labor Statistics published a big disclaimer in Friday's report. Every year they make adjustments based on population data. The monthly jobs number has been widely criticized for its "seasonal adjustments". According to some research into these season adjustments the BLS added 2,103,000 to reach its +113,000 job gain last month. That seems a bit ridiculous. You can read the article here.

Overseas Data

Economic data overseas remains mixed. Both the Bank of England and the European Central Bank (ECB) left interest rates unchanged last week at 0.50% and 0.25%, respectively. ECB President Mario Draghi's press conference failed to spark any fireworks. The Eurozone retail PMI data increased from 47.7 to 50.5 yet retail sales fell -1.6% month over month. Eurozone Producer Price Index (PPI) climbed +0.2% for the month but its year over year reading fell -0.8%. That was actually slightly better than expected but worries remain about the potential for deflation.

Germany reported some unexpected bad data last week. Factory orders fell -0.5% when economists were expecting +0.4%. German industrial production also fell -0.6% when expectations were for +0.5%. The U.K. said industrial production rose +0.4% for the month, which is an improvement over the prior -0.1% reading. Spain's industrial production came in much better than expected with a +1.7% gain versus estimates for +0.5%. Yet Spain's unemployment continues to rise.

Economic data in Asia was relatively quiet. The Chinese stock market was closed all week for their Lunar New Year holiday. The Chinese HSBC Services PMI data slipped from 50.9 to 50.7, that's a record low and on the verge of turning negative (below 50.0). The recent Chinese manufacturing PMI report of 50.5, a six-month low, helped fuel the recent stock market sell-off. On a side note, there is some speculation that China is no longer releasing their jobless data to hide their growing unemployment problem.

Major Indices:

Last week saw the S&P 500 index breakdown below its 100-dma, the 1770 and 1750 levels. The index found support near 1740 and produced a short-term double bottom before rebounding. For the week the S&P 500 index eked out a +0.8% gain, which pared its year to date loss to -2.78%. You'll notice that the bounce has stalled right at round-number resistance near 1800. If that wasn't enough there is also technical resistance at the 50-dma near 1810. If the S&P 500 can climb above these levels then shorts might panic and cover more positions. The 1850 level remains significant overhead resistance.

If the S&P 500 were to reverse then I would expect support near 1740 to fail and we would likely see a correction lower toward the simple 200-dma near 1711 or the 1700 level.

A -10% correction would be a drop to 1665.

chart of the S&P 500 index:

Weekly chart of the S&P 500 index:

The NASDAQ flirted with a breakdown below support near 4000 and its 100-dma but managed a bounce. The rebound lifted the index back above its 50-dma but the 4150 area might be short-term resistance. If this rebound continues then 4200 and 4250 are the next likely resistance levels. The NASDAQ composite's sharp rebound has produced a hammer style bullish reversal candlestick on its weekly chart (just like the S&P500 index).

A typical -10% correction would mean a drop toward 3818.

chart of the NASDAQ Composite index:

Weekly chart of the NASDAQ Composite index:

The small cap Russell 2000 index was the worst performer among the major U.S. indices. The $RUT plunged -3.1% on Monday's sell-off and ended the week with a -1.2% decline. Year to date the $RUT is down -4.0%. The low on Tuesday was 1082. That's close enough to call it a test of support at the 1080 level. You'll notice the rebound has stalled near its 100-dma and the $RUT remains below broken support and what could be new resistance near the 1120 level.

If the $RUT manages to keep bouncing then 1140 and the 50-dma could also be overhead resistance. If stocks reverse lower then the $RUT is likely headed for its 200-dma near 1060.

A -10% correction would mean a drop toward 1063.

chart of the Russell 2000 index

Weekly chart of the Russell 2000 index



Economic Data & Event Calendar

It's a relatively quiet week for actual economic data. The events to watch will be the new Federal Reserve Chairman Janet Yellen speaking before Congress on Tuesday and the Senate on Thursday.

Economic and Event Calendar

- Monday, February 10 -
(nothing significant)

- Tuesday, February 11 -
Wholesale inventory data
Fed Chairman Yellen to speaks to Congress

- Wednesday, February 12 -
(nothing significant)

- Thursday, February 13 -
Weekly Initial Jobless Claims
China CPI data
Business inventory data from December
Retail sales data for January
Fed Chairman Yellen to speaks to the Senate

- Friday, February 14 -
Eurozone GDP estimate
U.S. industrial production data
University of Michigan Consumer Sentiment data
Valentine's Day

Additional Events to be aware of:

Feb. 17th - market closed for president's day
Mar. 19th - FOMC policy update and economic projections
Mar. 19th - new Fed Chairman Yellen's first press conference




Looking Ahead:

Believe it or not but earnings season is still underway although we are past the halfway point. Out of the 60% of the S&P 500 components who have reported their Q4 earnings results about 67% have beaten Wall Street's bottom line estimates. Revenue growth remains challenging but more companies than expected have managed to beat the revenue estimates. Unfortunately about 59% of the S&P 500 companies who have reported have also lowered their 2014 guidance. That doesn't bode well for the stock market.

Speaking of not boding well the U.S. just pasted the February 7th debt ceiling deadline. Treasury Secretary Jack Lew sent a letter to congressional leaders this week warning them that the U.S. can use extraordinary accounting measures to keep things afloat but these special accounting tricks would only last until February 27th. Overall the stock market seems rather sanguine about the issue. The current mood would suggest that the democrats and republicans will compromise more quickly this. Why is that? The republicans want to avoid another government shutdown when they believe that they have some momentum using the public's distaste over Obamacare as a political tool to their advantage. Midterm elections are only nine months away.

The stock market correction may or may not be over even though most of the major U.S. indices produced a bullish-reversal style candlestick on their weekly charts last week. Josh Brown, at the Reformed Broker blog, has gathered some interesting tidbits on market corrections. Since World War II there have been 27 corrections of at least -10% or more. There have only been 12 bear markets (a drop of -20% or more). Of those 27 corrections the average decline was -13.3% with an average duration of 71 days (he suggested these were trading days, not calendar days, so about three months). The U.S. stock market has only seen three corrections since the market bottom of March 2009. The most recent correction was 2011 that ended in September that year. Combine that with the fact that the average bull market move between these corrections is about 221 trading days, then we're way overdue for a larger pullback. Remember the average correction is -13.3%. The S&P 500's closing low on Monday at 1741 is only a -5.8% pullback.

While we're on the subject of market pullbacks Doug Kass made an interesting observation. Whenever there is a new Federal Reserve Chairman the stock market tends to see a -7% drop in the major indices. The S&P 500 has already seen a -5.8% drop. The NASDAQ Composite had a -6.4% drop. The Dow Industrials has seen a -7.3% pullback and the Russell 2000 has already seen a -8.5% correction.

I'd like to remind readers that the S&P 500 has now gone over 840 days without a -10% correction. Plus, a bull market struggle to make past their fifth anniversary and March 2014 will be five years for the current bull. I'm not saying the bull market is over but it should make investors more cautious. According to the statistics above, we're due for a full-sized -10% or more correction. Since the average correction is -13.3% then that means a drop toward 1610-1600 on the S&P 500. My concern right now is a bounce back toward the recent highs only to see it fail.

FYI: Listening to one of the CNBC commentators this week, one of them said, "Gentlemen, if your lady says she does not want anything for Valentine's day this year, she is lying." He implied you should get her something anyway. Sounds like wise advice.

James