European Central Bank President Mario Draghi finally delivered on his "whatever it takes" threat and announced new monetary easing rules for the EU on Thursday. This was highly anticipated by the market but instead of selling the news investors bought it. U.S. stocks surged to new highs. David Tepper got in on the act with comments on Thursday suggesting his biggest concerns for the equity market have diminished followed the ECB's move. Mr. Tepper is a very influential hedge fund manager (Appaloosa Management fund) and the market quivered three weeks ago when Tepper issued his "nervous" comments at the SALT conference in Vegas.

The S&P 500 index broke out to record highs. The Dow Jones Industrials, S&P 100, Russell 1000 index, Russell 3000 index, NYSE Composite index, and the Dow Jones Transportation Average have all rallied to new all-time highs. Meanwhile the NASDAQ-100 index and the SOX semiconductor index both ended the week at new 14-year highs. Year to date the transportation stocks, semiconductors, and biotechs have delivered very strong gains with +10.9%, +15.3%, and +14.2% gains, respectively.

Market technicians are noting this burst of bullishness in the stock market has pressed the volatility index (the VIX) to new multi-year lows. As of Friday the VIX closed at 10.73. That's the first close under 11.00 since February 2007. There is an ancient market maxim that says "when the VIX is low it's time to go." The other half of that maxim is when the VIX is high it's time to buy. While the low VIX is a warning signal, trying to use it as an entry/exit strategy can be tough. The VIX was stuck near 10.00 for a long time back in 2005-2006.

Weekly chart of the Volatility Index (VIX)

Monthly chart of the Volatility Index (VIX)

Economic Data

The market digested a lot of economic data last week. In the U.S. the ISM manufacturing index improved from 54.9 in April to 55.4 in May. The ISM services index advanced 1.1 to 56.3 in May, which is the best reading since last August. Numbers above 50.0 suggest economic growth. May's ISM services number is the 52nd month in a row above 50.0. Vehicle sales in May hit their best levels since February 2007 with an annual pace of 16.7 million units, this was above analysts' estimates.

Investors were also wading through the labor market numbers. On Wednesday the ADP National Employment Report showed private businesses hired +179,000 people in May, which was below expectations. April's report was revised lower from 220K to 215K. On Thursday the weekly initial jobless claims rose to 312,000 and the prior week's number was revised higher from 300K to 310K. Yet in spite of the rise the four-week moving average has fallen to 310,250, which is the lowest reading since June 2007.

The big report was Friday's nonfarm payroll (jobs) number. Economists were expecting a gain of +220,000. The government report said we added +217K. The not too hot, not too cold jobs number allowed the market rally to continue. The unemployment rate was unchanged at 6.3%. Unfortunately the labor force participation rate was also unchanged at 62.8%. Think about that. Over one third of the labor force is not working.

According to CNNmoney it took two year for the economy to lose 8.7 million jobs during the "Great Recession", which pushed the unemployment rate to 10%. It has taken four years to gain back 8.7 million jobs. According to the Department of Labor this has been the longest and slowest job market recovery since they started tracking this data back in 1939. Sadly the jobs we recovered were not all the same jobs we lost. Many of the new jobs have been lower-paying service sector jobs like retail, wait staff, and bartenders.

Over the last six years we still had people graduating from college, graduating from high school, and immigrating to the U.S. That's about 150,000 new people joining the workforce every month. Analysts estimate that we need another seven million new jobs to get back to "normal". A recent survey found that economists believe it will take another three years before we're back to "full employment", which is unemployment at 5.5%.

Overseas Data

The Eurozone announced that their Q1 GDP growth estimate rose +0.2% quarter over quarter. Eurozone CPI (consumer-level inflation) increased +0.5% while their PPI (wholesale inflation) fell -0.1%. Their unemployment rate inched down from 11.8% to 11.7%. Eurozone manufacturing PMI declined from 52.5 to 52.2, which was worse than expected.

Germany said their manufacturing PMI declined from 52.9 to 52.3, worse than expected. Their industrial production inched up +0.2% for the month following last month's -0.6% drop. German factory orders improved +3.1% for the month, which was better than analysts were hoping for. Meanwhile Spain said their industrial production for +4.3% year over year, much better than expected. The Eurozone retail sales came in better than expected with a +0.4% gain for the month. The Bank of England left their main interest rate unchanged at 0.5% and left their asset purchase plan unchanged at 375 billion pounds.

The big event for the week was the ECB meeting on Thursday. ECB President Draghi delivered on his promise to act at the June meeting. They lowered all three of the ECB's interest rates. The ECB refinancing rate was reduced from 0.25% to 0.15%. The marginal lending rate is now 0.4% from 0.75%. The one that got the most headlines was the deposit rate for the major banks, which was lowered from 0.00% to -0.10%. That means the ECB will charge banks for holding their deposits.

The ECB hopes that this -0.1% fee will provoke the banks to lend more money to businesses and stop storing their cash with the ECB. Individuals saving money in European banks won't be charged this fee but odds are the banks will merely pass this expense onto its customers in their other products. Some analysts have suggested that a mere 0.1% change is not going to make that much difference to the banking system as a whole. It is noteworthy that most of the struggling southern European countries saw their bond yields fall toward record lows. Across the Pacific the country of Japan said their manufacturing PMI was unchanged at 49.9 while their services PMI improved to 49.3. Numbers under 50.0 suggest economic contraction. The Bank of Japan expects their economy to hit their 2.0% inflation target by fiscal year 2015. Meanwhile China saw improvement with its official PMI manufacturing index inching higher from 50.4 to 50.8 and their PMI services number improving from 54.8 to 55.5. Yet the China HSBC manufacturing PMI reversed with a drop from 49.7 to 49.4 and the HSBC services PMI dropped from 51.4 to 50.7.





Major Indices:

The S&P 500 index managed to breakout past a recent trend line of higher highs with last week's rally. Year to date the S&P 500 is up +5.4%. You can see on the weekly chart that the long-term trend looks good but it's arguably overbought at current levels. On the daily chart you can see the index ended the week just below potential round-number resistance at 1950.

On a short-term basis I would expect a brief pullback but the path of least resistance is definitely higher. Investors are likely aiming for the 2,000 mark, which may prove to be tough psychological resistance to break.

chart of the S&P 500 index:

Weekly chart of the S&P 500 index:

The tech-heavy NASDAQ broke through resistance near 4250 and looks headed for its 2014 highs near 4375. Last week's rally has pushed the NASDAQ's year-to-date gain to +3.4%.

The 4350-4375 zone is most likely resistance and odds are the NASDAQ will pause or retreat on its first move back into this zone. Broken resistance at 4250 should become new support.

chart of the NASDAQ Composite index:

Weekly chart of the NASDAQ Composite index:

The small cap Russell 2000 index was one of the better performers last week with a +2.7% surge. After underperforming the last few months the $RUT might try and play catch up. That could be painful for the shorts since bearish bets on the small caps had been rising since the March top.

Last week's big rally lifted the $RUT to a +0.1% gain for the year. On a short-term basis the index looks a bit overbought but broken resistance near 1140 should be new support.

chart of the Russell 2000 index

Weekly chart of the Russell 2000 index



Economic Data & Event Calendar

It's a quiet week for economic data. The only reports worth noting are the inventory data numbers, retail sales for May, and the consumer sentiment report.

Economic and Event Calendar

- Monday, June 09 -
(nothing significant)

- Tuesday, June 10 -
wholesale inventory data (from April)

- Wednesday, June 11 -
(nothing significant)

- Thursday, June 12 -
Weekly Initial Jobless Claims
Retail Sales (from May)
Business inventory data (from April)

- Friday, June 13 -
Producer Price Index (PPI)
University of Michigan Consumer Sentiment

Additional Events to be aware of:

June 18th, FOMC meeting
June 18th, Janet Yellen press conference
July 3rd, U.S. markets close early
July 4th, U.S. markets closed for holiday

Looking Ahead:

The normal "sell in May" trend did not appear this year. Instead we saw stocks accelerate higher in the last half of May. The good folks at The Stock Trader's Almanac did some research on years when the month of May was positive. They found that since 1968, when the market posted gains in May, we had a good chance of strong gains the rest of the year (about 70% chance). We also need to consider the historical trends that the summer of midterm election years tend to be volatile. Right now volatility is super low and due to reverse higher.

There is no denying the S&P 500's up trend. It certainly appears that the path of least resistance is up. Money managers are going to chase the market higher for fear of missing out on the rally. Many mutual funds only have five months left before their yearend on October 31st.

Plenty of analysts are starting to worry that investors are now too bullish. Bespoke Investment noted that the weekly survey of American Association of Individual Investors (AAII) saw bullish sentiment rise from 36.5% to 39.5% last week. This is above the historical norm of 38.4%. Meanwhile Peter Boockvar, managing director with The Lindsey Group, noted that the Investors Intelligence survey of advisors and newsletter writers saw bullish sentiment hit 62.2%. This is the second highest on record and is now above the 60.8 seen in August 1987 (before the 1987 crash in October that year) and above the 62.0 from October 2007, the market's last peak before a bear market drop.

Thus far the U.S. stock market has managed to overcome every obstacle in its path. There is nothing to suggest the market will not continue climbing although I am starting to hear analysts comments about how stock prices are outpacing corporate earnings. When stocks "get ahead of themselves" they eventually correct. Speaking of corrections the S&P 500 index has now gone almost 980 days without a normal -10% correction. We're about 800 days overdue for a correction but there is nothing that says we're going to see a pullback any time soon.

On a short-term note, after last week's big rally, I would not be surprised to see a brief pullback before moving higher.

James