Stocks endured a torrent of headlines and economic data last week and managed to post gains in spite of the growing conflict in Ukraine. There was an increase in M&A activity in the healthcare sector. The FOMC cut their QE program by another $10 billion a month. Jobs in the U.S. grew more than expected. Earnings data continues to stream in. Yet the focus remains on Ukraine. After traders bought the market's dip last Monday, equities saw a three-day bounce before stalling on Thursday and Friday. Housing and biotechs were some of the market's best performers last week while commodities like oil, silver, and gold all posted losses.

Economic Data

There was a steady parade of economic data for the market to digest. Factory orders rose +1.1% in March after a +1.5% gain in February. The Conference Board's Consumer Confidence Index slipped form 83.9 in March to 82.3 in April. The present situation component of the consumer confidence survey slipped from 82.5 in March to 78.3 in April. Personal income rose +0.5% in March following a +0.4% gain in February while personal spending came in better than expected with a +0.9% gain in March following a +0.5% gain in February.

The Chicago PMI data showed that manufacturing activity for the region rose from 55.9 in March to 63.0 in April. This was the best reading since October last year. The National ISM manufacturing index improved from 53.7 in March to 54.9 in April. Numbers above 50.0 for these surveys suggest economic growth. The New York area's ISM number only rose +0.3 points to 627.4. It was the smallest monthly gain in almost a year. Construction spending edged higher with +0.2% growth in March following a downwardly revised -0.2% drop in February. Meanwhile the Case-Shiller 20-city home price index showed home prices rose 13.2% in February from a year ago.

The Federal Reserve held a two-day meeting last week. As expected the Fed left rates unchanged and lowered their QE purchases by another $10 billion to $45 billion a month. The Fed's statement did reinforce the idea that the U.S. economy's slowdown in the first quarter was due to "adverse weather conditions". This is a theme we've been hearing for weeks and probably helped the market shrug off the terrible Q1 GDP numbers. Current estimates put U.S. GDP growth for the fourth quarter of 2013 at +2.6%. The preliminary estimate for the first quarter was a very anemic +0.1%. Early numbers can be volatile and it will likely be revised but will it be revised lower or higher? That is a pretty significant drop.

The ADP Employment report said private firms hired +220,000 new people in April. That leads us to Friday's nonfarm payroll report (a.k.a. the jobs report). Economists were expecting about +210,000 new jobs in April for this report. April's number was +288,000. March's report was revised up from +192K to +203K. February's data was revised higher from +197K to +222K. Put it all together and we had a pretty healthy number compared to the recent trend.

At the same time the U.S. unemployment plunged from 6.7% to 6.3%. That's the biggest one-month drop in three years and the lowest level since September 2008. Why the big drop? We had another huge surge down in the U.S. labor force, which saw another 806,000 people leave the work force. The U.S. labor force participation rate is at the lowest levels since 1978. This does not imply a strong, growing economy. A Bloomberg article referred to divergence between rising jobs and falling participation as "one of the biggest conundrums of the U.S. economic expansion."

Another challenge for the economy is the quality of jobs added. Comstock Partners pointed out that the lowest paying jobs "accounted for 22% of the job losses in the recession, but 44% of the jobs gained back in the recovery. Given these numbers, it is no wonder that consumer spending has been so restrained during the last few years."

Overseas Data

Economic data overseas was generally benign. Most global markets were closed on May 1st for Labor Day, also known as International Workers' Day. In Europe the Eurozone Consumer Confidence index improved slightly from -9.3 to -9.0. Eurozone manufacturing PMI inched higher from 53.3 to 53.4. Germany's manufacturing PMI ticked lower from 54.2 to 54.1. French manufacturing PMI advanced from 50.9 to 51.2. The U.K.'s manufacturing PMI rose from 55.8 to 57.3. Numbers above 50.0 suggest economic growth. Great Britain also said its GDP rose +0.8% for the quarter. Meanwhile Eurozone unemployment was unchanged at 11.8%.

In Japan the country saw a surge of activity ahead of a sales tax increase that took affect on Aril 1st. Household spending rose +7.2% in March while retail sales in March gushed +11.0%, showing the biggest jump since March 1997. One has to wonder how much Japan has pulled forward retail sales to avoid the tax increase and will now see a slowdown in activity. Japan's PMI dipped from 53.9 to 49.4. That's the first time their manufacturing activity has hit contraction territory in 14 months. Meanwhile the Bank of Japan left interest rates unchanged.

Nearby China said its manufacturing PMI improved from 50.3 to 50.4. Home prices in China, across its major cities, rose for the 23rd month in a row.

Ukraine-Russian Conflict

Sadly the situation in Ukraine is getting worse and getting worse quickly. Some are calling it a "civil war" in Ukraine as pro-Ukraine forces fight pro-Russian forces who want to secede from Ukraine. Ukraine's military has started taking back several towns and separatist occupied buildings in eastern Ukraine and the rebels are fighting back. People are dying on both sides. Two Ukrainian helicopters have been shot down. One was allegedly hit by a surface to air missile. Now where would Ukrainian rebels get one of those?

As you know Europe and the United States are blaming Russia for this conflict in Ukraine. Russia used unmarked soldiers to seize the Crimean region and then fostered anti-Ukraine sentiment until the people voted to leave Ukraine. Now they're taking a similar approach in eastern Ukraine. The Kiev government and the west claim to have proof that Russia has forces, dressed as Ukraine civilians, leading the rebellion.

The Ukraine government has been patient with protestors who seized government buildings and put up roadblocks in several eastern Ukrainian towns in recent weeks. When the militants seized U.N. observers last week the Ukrainians launched a more forceful approach to deal with the rebels. Now it appears the region is in open conflict.

The stock market panicked a bit on Friday when Russian President Putin called for an emergency meeting of the U.N. Security Council over the situation in Ukraine. Investors feared this was as preliminary step before he sent Russian troops into Ukraine as "peacekeepers". Russia's envoy to the U.N. was met with rebuke by some of the security council members for Russia's bogus pleas for help. The U.S. is said to have intercepted radio transmissions between Russia and the Ukraine separatists, which should remove any doubt over who is behind the Ukrainian rebellion.

The situation does not bode well for the stock market or the Russian or European economies. If Russian troops do cross the Ukraine border then the U.S. and EU will launch even stronger sanctions against Russia. Russia has promised to counter with their own sanctions against European and American companies. These sanctions could seriously hurt Russia's and Europe's economies who do a lot of business with each other. The equity markets would likely drop sharply on a Russian invasion into Ukraine and the bond market would rally as investors seek the safety of U.S. treasuries.

Germany Chancellor Angela Merkel was at the White House on Friday for a joint press conference with President Obama urging Russia to back down. Merkel and Germany are in a tough position. They do a lot of business with Russia and Germany imports a significant portion of their natural gas and oil from Russia. If the situation escalates Russia could hike up the price of energy or cut if off altogether. A recent New York Times article reported that Germany is Russia's third largest export market at $35.6 billion a year. Germany is also Russia's second largest import partner at $38.3 billion.





Major Indices:

The S&P 500's bounce off last Monday's low carried it toward resistance in the 1885-1890 area. The big cap index added +0.95% for the week, pushing its year to date gains to +1.7%. The long-term trend evident on the weekly chart below is still higher. Unfortunately short-term the momentum seems to be rolling over.

The 1890-1900 zone is overhead resistance. A breakout past 1900 would do a lot to inspire investor confidence and likely spark a significant amount of short covering. However, any such breakout would need to be more than just a few points past the 1900 mark. If the index does roll over then it could find support at 1850, 1840 (near its 100-dma), and the 150-dma near 1810.

chart of the S&P 500 index:

Weekly chart of the S&P 500 index:

The NASDAQ delivered a +1.19% gain for the week thanks in part to a decent bounce in the biotech stocks. Yet the rebound in the NASDAQ composite stalled at its trend line of lower highs and its simple 30-dma. This doesn't really inspire any confidence. The 100-dma and 50-dma are both overhead and likely resistance as well.

A breakout past 4200 could change investor sentiment on the NASDAQ. If the current bounce does roll over then we're probably looking at the NASDAQ retesting 4000 or its simple 200-dma.

chart of the NASDAQ Composite index:

The small cap Russell 2000 index underperformed its large cap peers with a +0.5% gain for the week. The $RUT is still down nearly 3% for the year. The bounce in the $RUT has also stalled near its trend of lower highs. There is additional overhead technical resistance in the 1150-1160 zone.

If this rebound rolls over we could see this index breakdown below support at its 200-dma and the 1100 level. A drop past the February intraday low of 1,082 probably signals a major correction for the $RUT.

The 2014 closing high was 1,187 on March 4th. A -10% correction would be a drop to 1,068.

chart of the Russell 2000 index

I normally do not discuss the Dow Jones Industrial Average since it is only 30 stocks. This past week the $INDU did set a new all-time closing high on April 30th at 16,580. The index appears to have resistance in the 16,600-16,625 zone. A close above 16,625 could boost investors confidence in spite of the narrow focus of the index, especially since financial media likes to quote the Dow Industrials as "the market".

chart of the Dow Jones Industrial Average



Economic Data & Event Calendar

After the rush of economic data last week this coming week looks pretty barren. The only market-mover on the list is probably the ECB decision and Draghi's press conference and that seems unlikely. The HSBC PMI data for China will be released on Sunday, May 4th and that has influenced the market in the past.

We are still in the midst of earnings season although the peak of announcements has passed. These reports will move individual stocks but are unlikely to move the broader market.

The real event for the market will be Ukraine and how that conflict develops.

Economic and Event Calendar

- Monday, May 05 -
ISM Services index

- Tuesday, May 06 -
Eurozone Services PMI
Eurozone Retail sales

- Wednesday, May 07 -
German factory orders

- Thursday, May 08 -
Weekly Initial Jobless Claims
ECB interest rate decision
ECB President Draghi's press conference

- Friday, May 09 -
Wholesale inventory data

Additional Events to be aware of:

May 26 - U.S. market closed for Memorial Day


Looking Ahead:

It could be an interesting week for stocks with the major U.S. indices setting at or near resistance. Do stocks breakout higher or do they roll over? The answer depends on Ukraine and given the escalation of violence in Ukraine I suspect we will see stocks roll over.

Russia has amassed an army of soldiers, tanks and aircraft on Ukraine's borders in recent weeks and Putin is just waiting for an excuse to send them into Ukraine to "protect" Russian-speaking people from the "evil" Ukraine government. While it is highly unlikely that the U.S. or Europe will get involved in a shooting war with Russia over Ukraine the economic sanctions that sprout from such an event would hurt international trade.

A Russian invasion of eastern Ukraine is already considered an inevitable event for some political pundits. Eastern European countries are growing nervous. I mentioned last week that Estonia, Latvia, and Lithuania were former Soviet states and now members of NATO. Any attack on a NATO country is supposed to spark a response from all 28 NATO countries but that doesn't necessarily make these Russian neighbors any less nervous.

Several NATO members are already flying defensive air patrols along NATO's border. What happens if one of them is accidentally shot down by the Russians? How will Russian President Putin respond if NATO announces new military bases in Estonia, Latvia and Lithuania? Analysts are already trying to guess what Russia's next move is after Ukraine? How far will Putin's land grab go?

The Washington Post and the Royal United Services have produced a detailed map of Russian forces that certainly make it look like Putin is preparing to invade Ukraine. You can view map of Russia's military on the Ukraine border (here).

Geopolitical tensions will be making headlines this week but market internals are also a factor. We've commented on the record high margin debt levels before. The last two times we saw margin debt retreat significantly from record highs it signaled a market top. It would appear that margin debt is retreating again so it's one more warning signal for investors to be aware of.

We also want to keep an eye on the bond market. I've been cautioning readers that if the yield on the 10-year U.S. bond falls below the 2.6% or its February 2014 low of 2.579% it could be a major warning for the equity market. The recent violence in Ukraine has helped produce a flight of quality into U.S. bonds and the yield has sunk to 2.59% as of Friday's close. Bonds look poised for a breakout rally, which will pull yields lower. Art Cashin updated his warning line to watch as a drop below 2.5% yield.

chart of the 10-year U.S. bond yield

Let's recap. We have a stock market that has bounced and stalled at resistance. Large cap indices are only a few points away from new highs while the NASDAQ and Russell 2000 remain in an intermediate down trend. That could be signaling that money managers want to keep their investments in liquid large caps so they can get out more quickly. Last week there were headlines that hedge funds had large bearish bets on the small caps. The U.S. GDP growth has plunged from +2.6% to +0.1%. Many blame this on the weather even though that excuse may not be entirely accurate. Job growth has accelerated but that has been blamed on a snap back from the cold winter months. At the same time the U.S. labor participation rate has fallen to levels not seen since 1978. The calendar has just crossed into the worst six months of the year time frame. We're approaching midterm elections, where stocks historically tend to be more volatile ahead of the election. China's economy is slowing down. Russia appears ready to invade Ukraine, which is facing a "civil war" led by separatists guided and armed by Russia.

That is a lot for the market to digest. If you forced me to predict the market's direction I would expect the NASDAQ and Russell 2000 to retest their April lows. If that occurs the S&P 500 would likely follow them lower. If somehow Russia does back down then a breakout to new highs in the S&P 500 and Dow Industrials could fuel a significant market-wide rally initially powered by short covering.

James