Stocks produced a significant relief rally following the Crimea referendum last weekend. Results showed that 95.5% of Crimea voted to join Russia. The West views the vote as illegal but that didn't stop Russia from accepting Crimea and annexing the region. The facts that this has not turned into a shooting war in the Ukraine and that sanctions against Russia have (thus far) been mild helped spur the equity markets' rally.

The markets were also digesting the latest FOMC meeting policy statement and Janet Yellen's first press conference as Fed chairman. Markets also reacted to the Federal Reserve's latest bank stress test. Financial stocks showed relative strength after the Fed said 29 of the 30 banks passed their test. Wednesday marked the end of a two-day FOMC meeting where the Fed released its longest policy statement on record. As expected the Federal Reserve reduced their QE program by another $10 billion a month, down to $55 billion. This reduces their asset purchases to $25 billion in mortgage-backed securities and $30 billion a month in long-term U.S. treasuries.

The market was not expecting the Federal Reserve to remove the 6.5% unemployment as a condition for potential tightening. Another surprise was Yellen's definition of a "considerable time." Previous Fed statements said that the FOMC would not raise interest rates for a "considerable time" after the current QE program had ended. When asked during the press conference on Wednesday what a considerable time was for the Fed, Yellen responded with a seemingly casual remark that it was "probably six months" or so. The previous expectation was that a "considerable time" was more in the 10 to 12 month range. Thus the bond market reacted since this means the Fed might raise interest rates a few months sooner than everyone expected.

At the current rate the Federal Reserve is tapering their QE program, $10 billion per fed meeting, the current consensus puts the end of the QE program at January 1st, 2015. Yet comments from Dallas Fed President Richard Fisher this past week threw another curve ball at the market. Fisher suggested he would like to see the QE program end about three months earlier than that. If you combine his time line with Yellen's six-month "considerable time" comments then the Fed could start raising rates a lot earlier than previously expected.

Economic Data

Economic data in the U.S. continues to be mixed but some of the manufacturing data was encouraging. The New York Empire State manufacturing survey came in at 5.6 versus expectations at 7. Yet the Philly fed survey jumped to 9 compared to estimates for a reading near 3. Overall U.S. factory output rose +0.8% in February, the biggest one-month rise since August. Looking at inflation the consumer price index (CPI) was in-line with estimates with a rise of 0.1% in February following a +0.2% rise in January.

The U.S. real estate market is still shaking off a cold winter. The NAHB homebuilder sentiment survey hit 47, which was below expectations. Housing starts fell -0.2% to an annualized pace of 907,000. Yet building permits rose +7.7% to an annual pace of 1.01 million, which was better than expected. Existing home sales in February slipped -0.4% to an annual pace of 4.6 million home. Unfortunately, that is the slowest pace of existing home sales since July 2012. We will see more home sales and price data this week.

Overseas Data

It was a relatively quiet week for economic data overseas. The Eurozone CPI reading came in at +0.3% for the month, slightly below expectations. The Eurozone ZEW economic sentiment survey declined from 68.5 to 61.5, which was worse than expected. On a positive note car sales in Europe posted their sixth monthly gain with a +7.6% rise in February. Meanwhile Japan said their trade deficit retreated from 1.76 trillion yen to 1.13 trillion thanks to a +9.8% rise in exports. The Chinese government announced plans to accelerate several major construction projects to try and combat their slowing economy.

Russia

The fallout from Russia's mostly bloodless invasion of Ukraine's Crimea peninsula will not be fully known for years. We are starting to see some interesting developments. Thus far Russian President Vladimir Putin has scoffed at sanctions from Europe and the U.S. It does seem interesting that the U.S. is targeting sanctions at individual Russians but not Putin himself.

Last week saw the Fitch rating agency and Standard & Poor's both lower their credit outlook on Russia to "negative" over worries that sanctions would further hurt Russia's already slowing economy. The country is currently rated at BBB, the second lowest investment grade possible.

This West versus Russia attitude could damage recent progress in negotiations with Iran over its nuclear strategy. Russian Deputy Foreign Minister Sergei Ryabkov suggested Russia's participation in the Iran talks could be a bargaining chip to counter western sanctions.

The U.S. may also have to deal with the long-term implications of an uncooperative Russia and our joint efforts in space. It might be called the International Space Station but the U.S. pays $150 million per seat to Russia to fly our astronauts up there. The massive Saturn 5 rockets we use to launch U.S. satellites into orbit come from Russia. They could refuse to sell them to us if the relationship continues to sour.




Major Indices:

Believe it or not but in spite of all the news about Russia, the Fed tapering, and a slowing China, the S&P 500 index still managed to tag a new all-time high on Friday morning. The sharp pullback from that high is a little bit troubling and might signal a short-term bearish double top pattern. Yet for the week the S&P 500 gained +1.38%.

The 1885 area is clearly overhead resistance now. Beyond that the 1900 mark is probably round-number, psychological resistance. If stocks do see a pullback then 1840-1850 area has been support in the past. Below that the 1820 and 1800 levels are probably additional support.

chart of the S&P 500 index:

Friday's -0.98% drop in the NASDAQ shaved its gains for the week down to +0.74%. The NASDAQ composite has a short-term trend of lower highs (from its March peak) and Friday's session has created a bearish engulfing candlestick reversal pattern. On a short-term basis I would expect the NASDAQ to move lower.

The 4240 level has been support in the past. I would look for additional support near 4200 and 4150.

intraday chart of the NASDAQ Composite index:

chart of the NASDAQ Composite index:

The small cap Russell 2000 index gave up -0.4% on Friday. That reduced its weekly gain to +1.0%. The index is only 20 points or 1.6% away from a new all-time high. The action on Friday might be a short-term reversal pattern.

If the market rally resumes then the 1220 area and the trend of higher highs is likely resistance. If stocks retreat then the $RUT should find some support in the 1160 area.

chart of the Russell 2000 index



Economic Data & Event Calendar

There is nothing too significant on the economic calendar this week. We will see the latest consumer confidence numbers and anther revision for the Q4 GDP estimate. Nothing on the calendar is really market moving.

President Obama will be traveling to Europe for a G7 meeting. It was going to be a G8 meeting but after Russia's little invasion into Crimea the club has kicked Russia out.

Q1 earnings season will start soon on April 8th.

Economic and Event Calendar

- Monday, March 24 -
(nothing significant)

- Tuesday, March 25 -
Case-Shiller 20-city home price index
G7 Meeting
Consumer Confidence data
New home sales data

- Wednesday, March 26 -
Durable Goods Orders

- Thursday, March 27 -
Weekly Initial Jobless Claims
Q4 GDP estimate (revision)
Pending home sales data

- Friday, March 28 -
personal income and spending data
University of Michigan consumer sentiment (final March reading)

Additional Events to be aware of:

April 18th - U.S. markets closed
April 30th - FOMC interest rate decision and outlook


Looking Ahead:

The stock market could be left searching for a catalyst to move higher. The back and forth sanction talk between Russia and the West is currently just a minor irritant for the equity market but if it escalates the issue could have a bigger impact. The real worry would be any escalation of Russia's land grab. The U.S. and European allies remain concerned over the tens of thousands of Russian soldiers on Ukraine's eastern border. Now there are rumors that the Russian-leaning eastern half of Ukraine wants to secede from Ukraine and join Russia as well.

We are only a few days away from the end of the first quarter. Stocks could see some window dressing by fund managers. However, the last week of March does not have the strongest history for any real gains. Pretty soon we're going to hear market pundits talking about the "sell in May" and go away phenomenon and the worst six months of the year (May through October). This year is a midterm election year and the months prior to the election tend to be more volatile than non-election years.

The big picture for the U.S. markets would suggest the overall trend is still up. However, recent trading action has created some bearish technical signals and we are seeing a deterioration of the fundamentals, like fewer stocks above their 50-dma and fewer new highs. I would not be surprised to see another mild pullback. This market has made it more than 880 days without a -10% correction. Eventually we will see one.

James