Janet Yellen, the new Federal Reserve Chairman, reassured market participants on Tuesday and the U.S. stock market went on to have its best week of the year. That pretty much sums up the week in one sentence. Yellen testified for four hours before the House Financial Services Committee on Tuesday and did her best to not rock the boat as she promised to stay data dependent. Meanwhile the bounce in stocks continued with the S&P 500 index up six out of the last seven days and the NASDAQ now up seven out of the last seven trading days.

The major U.S. indices all posted gains of more than +2% with the Russell 2000 index gaining almost +3%. The S&P 500 large cap index is only about 13 points away from a new all-time high (less than one percent). The NASDAQ composite ended the week in positive territory for 2014. Other big winners were semiconductors and biotechs, both up +4% for the week.

A drop in the U.S. dollar had an impact on commodities. Crude oil continued its rally and is now up five weeks in a row. Gold has rallied seven days in a row and is now up +9.4% for the year. Silver had its best one-week rally since March 2008 and is up +9.7% for the year.

Economic Data

Surprisingly the trend of negative economic data has not hampered the market's rally. We have continued to see a parade of disappointing or downright bearish economic data but investors don't seem to care. Everyone seems content to just blame it on the extremely cold winter weather and move on.

U.S. industrial production in January fell -0.3% when economists were expecting a +0.3% gain. Manufacturing production had its largest drop in May 2009 with a -0.8% decline in January. Motor vehicle assembly plunged -5%. The early look at the University of Michigan consumer sentiment survey was unchanged in February at 81.2. Expectations were for a dip toward 80. One of the biggest surprises last week was the monthly retail sales data with January U.S. retail sales falling -0.4%. The government revised December's retail sales lower from +0.2% to +0.1%. If consumers are spending less than it wasn't a surprise to see business inventories rising. The latest inventory data showed December business inventories up +0.5% following a +0.4% gain in November.

Europe

Economic data out of Europe was mixed. France said its industrial production fell -0.3% when analysts were expecting a +0.1% gain. The Eurozone's industrial production dropped -0.7%, which was double the -0.3% estimate and down sharply from the +1.6% a month earlier. Eurozone GDP estimates showed +0.3% growth, which was slightly better than expected. This marks the third consecutive quarter of growth, albeit very, very slow growth. The Eurozone GDP gains were driven by small GDP advances in Germany, France, and Italy. Speaking of Italy, it was a very bad week for Italian Prime Minister Enrico Letta. There was a growing chorus calling for Letta to resign. On Friday, after less than a year in office, Mr. Letta did resign.

Asia

It seems like worries over an economic slowdown in China might be a little premature. China said its trade surplus soared from $25.6 billion to +31.86 billion last month. Imports surged +10.0% while exports climbed +10.6%. These import/export numbers were three to five times stronger than expected. Inflation data in China is on the rising with its latest CPI number hitting +2.5% year over year. Yet inflation at the wholesale level fell with the PPI down -1.6%. The U.S. isn't the only market bouncing with the Chinese Shanghai index up five out of the last six sessions. Elsewhere in the region Japan said its core machinery orders collapsed with a -15.7% drop month over month. Analysts were expecting a -4.1% decline.

Major Indices:

The market's bounce has been dramatic and actually sharper than its recent sell-off. This past week saw the S&P 500 index rally past potential resistance at 1800 and its 50-dma. The next challenge is resistance near 1850. A breakout past 1850 would be new all-time highs. A failure at 1850 and technicians will worry it's a short-term bearish double top.

On a short-term basis the S&P 500 does look a bit overbought with a 100-point, virtually non-stop bounce from the 1740 level. Odds that the S&P 500 will at least pause at the 1850 level are pretty high. We can watch for potential support near 1800 if stocks see a pullback. If the S&P 500 does breakout higher the 1900 is likely resistance.

chart of the S&P 500 index:

The NASDAQ has been a market leader. The index is up seven days in a row and delivered its best rally since July 2011. It's up +6.9% from its February 5th low of 3968. The index tagged a new 14-year high on Friday. If the rally reverses here it will look like a bearish double top. The problem is that stocks look overbought after such a fast bounce and are probably due for a pause, which could fuel the double-top fears.

On a short-term basis the 4200 and 4180 levels could act as support. Overhead the 4300 and 4400 levels are potential resistance.

chart of the NASDAQ Composite index:

The small cap Russell 2000 index ($RUT) saw the biggest bounce last week (+2.9%) but since this index had fallen the most it's not surprising to see the big round. The $RUT fell exactly 100 points (-8.4%) from its high of 1182 to the intraday low of 1082 (on Feb. 5th). The current rebound has lifted the $RUT above resistance near 1140 and its 50-dma. The next level of resistance could be the 1165 and 1180 levels. However, after such a sharp bounce the $RUT may be due for a pullback now. If the Russell falls back below the 50-dma again then 1120 and 1100 remain potential support levels.

chart of the Russell 2000 index



Economic Data & Event Calendar

We have a holiday shortened week with the U.S. stock and bond markets closed on Monday for President's day. The market will digest a couple of Fed surveys from New York and Philadelphia. Analysts will be eager to see the latest FOMC Minutes from the last meeting.

Economic and Event Calendar

- Monday, February 17 -
U.S. market closed for President's Day
Bank of Japan interest rate decision

- Tuesday, February 18 -
New York Empire State manufacturing survey
NAHB housing market index

- Wednesday, February 19 -
Produce Price Index (PPI)
housing starts and building permit data
FOMC Minutes
China HSBC manufacturing PMI

- Thursday, February 20 -
Weekly Initial Jobless Claims
Consumer Price Index (CPI)
Philadelphia Fed regional survey
Eurozone manufacturing PMI

- Friday, February 21 -
Existing home sales data from January

Additional Events to be aware of:

Mar. 19th - FOMC policy update and economic projections
Mar. 19th - new Fed Chairman Yellen's first press conference




Looking Ahead:

Blame it on the weather seems to be the market's excuse to ignore the latest round of disappointing economic data. It is true that the colder than normal winter is having an impact on the economy the assumption is that once the weather improves the U.S. will see this big snap-back surge activity due to pent up demand. If that pent up demand doesn't show up we could be in trouble.

Another issue that could be boosting investor sentiment is speculation that the U.S. Federal Reserve might taper the taper. The economy is not growing as fast as expected. Job growth has been a disaster with two big monthly misses in a row. Industrial production is falling. Consumer spending is falling. The trend in retail sales has been declining for three months in a row. The latest GDP numbers were rising due to rising inventories but if consumers don't buy that inventory, then what? Thus there has been some speculation that the Fed might actually slow down or pause their "taper" to the current QE program. There are even some pundits forecasting that the Fed will be forced to ease again (increase stimulus).

Analysts expectations for growth are falling due to the disappointing data and the weather. This past week Goldman Sachs lowered their Q1 GDP estimate to +1.9% after the terrible retail sales numbers. Barclays reduced their Q1 GDP growth estimate from 3.2% to 2.2%. Credit Suisse lowered their estimate to 1.6% and Citigroup cut their estimate to just +1.0%.

Another major story last week was news that the republican controlled congress managed to pass a "clean" debt-ceiling bill by a vote of 221 to 201. This new legislation raises the debt to $18.2 trillion, which is expected to last until March 2015. The democrat controlled senate then passed it with a vote of 55-43. This removes the threat of a major political fight in Washington over raising the debt ceiling. This is definitely good news for the stock market, probably not so good for the country when our GDP is only about $16 trillion.

It would appear that the market's path of least resistance has returned to higher. However, this coming week will be a significant test. If the S&P 500 fails at resistance near 1850 it's going to generate some worry about a potential top.

James