The U.S. market rally started to lose steam as the S&P 500 index neared resistance and investors digested a parade of disappointing economic data from China, Japan, Europe and the U.S. The International Monetary Fund (IMF) cautioned investors last week that global growth is still fragile. February has been a rough month for economic data but that hasn't stopped investors from pouring money into equities. According to Bank of America equity fund inflows surged to $13.4 billion, the strongest pace in 12 weeks. It would see the "blame it on the weather" excuse is still working.

The Russell 2000 index was the best performer among the major indices for the holiday-shortened week. The NASDAQ managed to tag new 14-year highs but the Dow Industrials and S&P 500 posted minor declines. Precious metals continue to climb with gold up +0.5% for the week, pushing its year to date gain to +10%. Silver added another +1.8% on top of last week's surge and silver's rally has hit +11.8% year to date. One of the best performing groups remains the biotechs with a +4.7% climb last week, lifting its year to date gain to +18.3%. One of the surprise movers was coffee price, which surged higher in what looked like a short squeeze. Spot prices for coffee are up +75% from their November 2013 lows.

chart of the Dow Jones Coffee ETN (JO):

Economic Data

Inflation in the U.S. remains tame. The Producer Price Index (PPI) gauge of wholesale-level inflation rose +0.2% in January following a +0.1% gain in December. The retail level Consumer Price Index (CPI) rose +0.1% in January following a +0.2% gain in December.

The two regional Federal Reserve surveys out last week were both big disappointments. The New York Empire State manufacturing survey plunged from 12.5 in January to 4.5 in February. Analysts were expecting a dip to 11.0. The Philadelphia Fed survey crashed from +9.4 to -6.3. This was the first negative reading since May last year and the biggest one-month drop since June 2012. The common excuse was to blame it on the weather.

Speaking of weather the market is still blaming the unusually cold winter on terrible housing numbers even though the logic doesn't hold up. The latest existing home sales data reported sales plunged -5.1% in January to their lowest levels since July 2012. The annual pace of existing sales fell to 4.62 million homes. The weather excuse doesn't hold up since the western U.S., largely unaffected by the severe storms this year saw its sales pace fall -7.1%. The amount of inventory on the market rose from 4.6 month supply to 4.9 months. A normal inventory is about 6 months supply. It was interesting to note that the number of first time home buyers came in at an all-time low of 26%. First time buyers normally average about 40%.

A sharp drop in housing starts was also blamed on the weather with nationwide housing starts down -16% in January to an annual pace of 880,000. That's down from a revised reading of 1.048 million pace in December. The southern U.S., which was mostly unaffected by the recent winter storms, saw housing starts decline -12.5%. Mortgage applications also declined with a -4.1% drop last week to their lowest reading since September 2011. Homebuilder confidence was also retreating with the NAHB housing market index falling from 56 to 46, the lowest reading since May 2013.

Europe

Manufacturing PMI data for the Eurozone fell came in at 53.0 versus estimates for 54.0. This was driven by a drop in Germany's PMI, which fell from 56.5 to 54.7 and French manufacturing PMI, which declined from 49.3 to 48.5. Numbers below 50.0 indicate economic contraction. In the good news category we did see Moody's Investors Service upgrade their debt rating on Spain. The country of Spain continues to struggle with one of the worst recessions in decades and massive unemployment problems. Moody's is seeing improvement and raised Spain's credit rating one level to Baa2 with a "positive" outlook.

Asia

Worries about an economic slowdown in China persist thanks to the latest PMI data. The HSBC China manufacturing PMI dropped from 49.5 to 48.3. This is a seven-month low and numbers below 50.0 indicate contraction. Meanwhile it was a volatile week for Japan's NIKKEI stock index with big moves in both directions. Japan's GDP growth estimate came in at +0.3% for the quarter when economists were expecting a rise to +0.7% growth. Following this disappointing GDP growth the Bank of Japan left its interest rate policy unchanged. Another disappointing headline was Japan's trade deficit hit a record high of 1.82 trillion yen. Analysts were expecting 1.56 trillion. Japanese exports rose +9.5% but economists were expecting +12.6% while imports rose +25.0%.

Major Indices:

The large cap S&P 500 index saw its rally stall as it neared resistance near its all-time highs in the 1850 area. I warned investors last week that this index would likely pause at resistance after a +100 point bounce from its February lows. The question on everyone's mind is whether the S&P 500 will fail at this resistance level of breakout higher?

The line to watch is 1850. A strong close above 1850 would be bullish and likely fuel some short covering. The next likely resistance level would be 1900. A reversal here near resistance might mean we're headed for a larger correction and a new relative low below 1740.

chart of the S&P 500 index:

The NASDAQ composite has continued to push higher with a little help from the biotech industry. The NASDAQ has closed at new 14-year highs and is nearing potential round-number resistance at the 4300 mark. If the rally continues then a breakout past 4300 could signal a run toward its trend line of higher highs (see chart). Meanwhile a normal retracement of the February bounce would mean a pullback toward 4200 or possibly the 4150 area.

chart of the NASDAQ Composite index:

The small cap Russell 2000 index has had a very strong bounce from its February lows (+7.5%). The next level of likely resistance would be 1180 and its January highs. While a good place to look for short-term support is probably 1140 and its simple 50-dma.

chart of the Russell 2000 index



Economic Data & Event Calendar

The Q4 earnings season is unofficially over now that retail giant Wal-Mart (WMT) has reported. Just seven more weeks and the Q1 earnings season will start with Alcoa's earnings report on April 8th. In spite of all the angst over Q4 profits it was the best earnings season since Q2 2011. Average profit growth was +7.8%. However, the market is always looking forward and almost two-thirds of companies reporting also lowered their guidance.

Looking at the schedule this week the event that is likely to garner the most attention will be newly minted Federal Reserve Chairman Janet Yellen's appearance before the Senate on Thursday.

Economic and Event Calendar

- Monday, February 24 -
(nothing significant)

- Tuesday, February 25 -
Case-Shiller 20-city home price index
Consumer Confidence survey
German GDP estimate
Richmond Federal Reserve Manufacturing survey

- Wednesday, February 26 -
New home sales data

- Thursday, February 27 -
Weekly Initial Jobless Claims
Durable Goods Orders
Kanasas City Fed manufacturing survey
Fed Chairman Janet Yellen testifies before the Senate

- Friday, February 28 -
U.S. Q4 GDP estimate
Chicago PMI for February
pending home sales

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:

We are about two weeks away from a significant milestone for the market. March 9th, 2009 was the bottom of the market. That makes March 9th, 2014 the fifth anniversary for the bull market. Statistics state that only 30% of bull markets every reach their fifth birthday. However, if they do make it past year five then they have a 60% chance of reaching their 6th anniversary.

After 2013's stellar market performance the general consensus was that 2014 would likely be an up year but not as good as 2013. Analysts predicted that the hallmark of 2014 would be increase volatility. Thus far 2014 is not letting them down with a volatile first seven weeks. Scott Krisiloff with Avondale Asset Management recently posted a chart of the S&P 500's 2014 performance versus the season trends over the last ten years. The pattern would suggest that stocks tend to rally from early March into late April. Let's hope that pattern stays true again this year.

S&P 500 2014 versus Last Ten Years (first six months)

(chart by Avondale Asset Management)

The legendary Art Cashin, Director of Floor Operations for UBS, summed up where we are pretty concisely. Everyone is watching the 1850 level on the S&P 500 index (actually the 1848-1851 area). If the S&P 500 fails at this level again then it could signal a "severe pullback". On the other hand, if the S&P 500 breaks higher then it could signal a "stampede" of new buying (and likely some short covering).

Overall the stock market has been very resilient considering the trail of disappointing economic data and geopolitical unrest last week. Massive protests in the eastern European country of Ukraine turned violent with soldiers and police firing on protestors killing more than 75 people. After a hastily brokered ceasefire the protestors refused to leave and 24 hours later the Ukraine parliament ousted President Viktor Yanukovych who had fled the capital city of Kiev. Yanukovyh is claiming a coup and refusing to step down. Meanwhile former Prime Minister Yulia Tymoshenko has been released from prison and pledged to run in upcoming elections. Ukraine's neighbor, Russia, a supporter of the ousted president, remains a wildcard with one Russian official said the situation could spark a war that might split the country of Ukraine in half.

Meanwhile the South American country of Venezuela continues to descend into lawlessness. The country has seen massive protests for two weeks as citizens rally against massive inflation, constant food shortages, government oppression, and rampant crime. At least ten people have died and more than 100 wounded. The protests do not appear to be losing momentum.

Turning back to the market, after such a big bounce from its February lows we're probably due for a dip. Yet a pullback now might spark fears of a new lower high (for the Dow Industrials and the Russell 2000) and a potential double top for the S&P 500.

James