Better than expected earnings results managed to levitate the market near its highs most of the week. The S&P 500 index and the Dow Jones Transportation Average both tagged new record highs. Yet a round of disappointing earnings headlines on Thursday night and Friday morning helped spark some profit taking on Friday. Market watchers were pointing fingers at earnings results and guidance from Visa (V), Amazon.com (AMZN) and Starbucks (SBUX) as catalyst for the pullback. Simmering geopolitical risks with Russia and Israel added to the background noise.

The market's widespread pullback on Friday sliced the S&P 500's gain for the week to 1/10th of a point. The NASDAQ composite eked out a weekly gain but the Dow Industrials and the small cap Russell 2000 both posted losses. The transportation average extended their gain to 13.89% for the year. Biotechs bumped their gains to +17.8% for the year. The semiconductor SOX index had a really rough week with a -4.1% plunge but is still up +15% year to date.

Continued worries over the regional conflict between Ukraine and Russia is getting worse. Meanwhile the Israeli ground offensive in Gaza to shut down terrorist rocket attacks continues to draw a lot of attention. This has helped push the U.S. dollar higher and the dollar index is breaking out from a five-month base. At the same time the Euro currency is sinking. Crude oil futures inched higher while precious metals like gold and silver drifted lower in spite of the geopolitical worries.

Headlines that Goldman Sachs had downgraded equities over the next three months only added to the list of reasons for traders to take profits on Friday. Goldman's lead analyst for their portfolio strategy team commented on the seasonal trends for late summer weakness in equities and the rally in bonds as areas of concern. This is a short-term call. Goldman is still bullish on stocks and expect the market to rally +10% over the next 12 months.

The rally in bonds is noticeable and driving yields on the 30-year U.S. bond to 12-month lows. Meanwhile the yield on the 10-year note is nearing its May 2014 lows. If money is looking for safety in U.S. bonds what does that say about investor sentiment toward stocks? It's possible that we're seeing foreign investors buying U.S. bonds as a safe haven.

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

Weekly chart of the U.S. 30-year bond yield



Economic Data

Economic data was mostly benign with the exception of new home sales. The Producer Price Index (PPI) report for June showed wholesale inflation up +1.6% thanks to a surge in energy costs. Yet the core Consumer Price Index (CPI), if you exclude food and energy, only rose +0.1% in June. That's down from a +0.3% increase in May. The U.S. saw durable goods orders rise +0.7% in June, which is improvement over the -1.0% drop in May.

Existing home sales for June rose from an upwardly revised 4.91 million SAAR in May to annual pace of 5.04 million in June. Yet the pace of new home sales declined. The Commerce Department reported an -8.1% drop in new home sales in June to 406,000. May's new home sales pace was revised lower from 504K to 442K. The price of new homes continues to rise with a +5.3% increase in June, year over year, to $273,500.

One of the more notable economic headlines last week was the weekly initial jobless claims, which plunged to 284,000. Economists were expecting a number around 307,000. The latest report is the lowest level for new claims since May 2007. The four-week moving average has fallen to 302,000. Analysts started to speculate if the job market was heating up faster than the Federal Reserve expects and if the Fed was behind the ball on its timetable to increase rates.

Overseas Data

Economic data overseas was mixed. The Eurozone manufacturing PMI inched up from 51.8 to 51.9. Germany's manufacturing PMI improved from 52.0 to 52.9 while France's PMI slipped from 48.2 to 47.6. Numbers above 50.0 suggest growth and under 50.0 indicate economic contraction. Elsewhere the German Ifo Business Climate Index declined from 109.7 to 108.0, which was worse than expected.

Peter Boockvar, with the Lindsey Group, noted that the Geopolitical tensions between the Europe and Russia over the Ukraine conflict and all the sanctions that have been placed on Russia are starting to affect the Germany economy. Germany's GDP growth is now expected to slide from +0.8% in Q1 to +0.3% in Q2.

The numbers out of Asia were also a mixed bag. The Japanese government reduced their 2014 GDP growth forecast from +1.4% to +1.2%. The main culprit was slowing demand from emerging markets. This was echoed in Japan's -2% drop in exports. Japan also reported their July manufacturing PMI reading slipped from 51.5 to 50.8. It was a different story in China with the latest China HSBC manufacturing reading hitting an 18-month high at 52.0. Remember, numbers above 50.0 suggest growth. Analysts believe China is seeing improvement thanks to the government's recent stimulus tactics.

The International Monetary Fund (IMF) reduced their global outlook last week. The sharp slowdown in the U.S. during the first quarter of 2014 has forced them to adjusted their U.S. growth estimates from +2.8% for 2014 to +1.7%. They are optimistically leaving their 2015 U.S. growth forecast at +3%. The IMF also revised their projections on China and now expect China's economy to grow at +7.4% in 2014. That's a small revision from +7.5% but the IMF estimates that China will slow to +7.1% growth in 2015. Worldwide the IMF has reduced their 2014 estimates from +3.6% to +3.4%.

Argentina continues to make headlines as well. We are now less than a week away from Argentina's second debt default in 13 years. The deadline was actually the end of June and July 30th will be the end of their 30-day grace period.





Major Indices:

The big cap S&P 500 index traded above 1,990 for the first time in history last week. Friday's profit taking pushed the index to short-term technical support at its 20-dma. If you look at the weekly chart below you can see how the S&P 500 has been hovering near the midline of its long-term bullish channel.

While the trend is obviously up I am still concerned that we might see the S&P 500 tag resistance at the 2,000 mark and then correct lower. Right now 2,000 is acting as a magnet. Yet once the index hits that level it could act as resistance.

If the market sees any significant pullback I would look for support near 1950 and 1900. Year to date the S&P 500 index is up +7.0%.

chart of the S&P 500 index:

Weekly chart of the S&P 500 index

The NASDAQ composite came within 15 points of hitting the 4,500 level last week. Any further pullback from current levels and July will start to look like a short-term bearish double top pattern. I would look for support in the 4350-4375 area. The 4485-4500 zone remains overhead resistance.

If we see a significant market pullback then the NASDAQ will likely test the 4200 level. Below that it could be a drop to 4,000. Year to date the NASDAQ composite is up +6.5%.

chart of the NASDAQ Composite index:

Weekly chart of the NASDAQ Composite index

The small cap Russell 2000 index continues to march to the beat of a different drummer. It just happens to be playing a sad song as the $RUT continues to underperform its peers. The peak in March and now July certainly looks like it could be a major double top pattern.

While the S&P 500 hits record highs and the NASDAQ flirts with 14-year highs the $RUT is actually down -1.6% year to date and off -5.2% from its 2014 highs.

The current trend would suggest the $RUT is headed for support in the 1085 area. If small caps suddenly rally then look for resistance in the 1205-1210 zone.

chart of the Russell 2000 index

A month ago Wall Street was expecting +7.1% earnings growth in the second quarter. Thus far with about half of the S&P 500 companies reporting their Q2 results, the number has been an unexpected +8.3% growth. There are always big hits and misses that make headlines but overall the trend has been very positive. I cautioned readers that prior to earnings we saw analysts reducing their estimates and that might allow companies to come in ahead of expectations. This week we will see another 140 S&P 500 companies announce their Q2 results.


Economic Data & Event Calendar

It's a big week for economic news. Investors will be digesting the ISM manufacturing data, our first look at U.S. Q2 GDP growth, the jobs report on Friday, plus an FOMC meeting midweek.

The ADP Employment Change Report on Wednesday is expected to see private job growth fall to 200,000 in July from 281,000 in June. Economists are estimating the U.S. grew +2.5% in the second quarter. That compares to a dismal -2.9% contraction in the first quarter.

No one really expects any surprises from the Federal Reserve on Wednesday. Let's hope they do not surprise Wall Street. Right now everyone expects them to hold steady and end their current QE program in October this year.

Economic and Event Calendar

- Monday, July 28 -
Pending Home Sales for June

- Tuesday, July 29 -
Consumer Confidence for July
Case-Shiller 20-city Home Price index

- Wednesday, July 30 -
Debt default deadline for Argentina
ADP Employment Change Report
FOMC interest rate decision
Q2 GDP estimate

- Thursday, July 31 -
Weekly Initial Jobless Claims
China HSBC manufacturing PMI data
Chicago PMI data
Eurozone PMI

- Friday, August 1 -
Auto & truck sales for July
Construction spending for June
Nonfarm Payrolls (jobs) report for July
Unemployment Rate
Personal Income and Spending
University of Michigan Consumer Sentiment Survey
ISM Index

Additional Events to be aware of:

Sept. 1st - U.S. market closed for Labor Day

Looking Ahead:

As we look ahead the situation on the Ukraine-Russian border is not improving. There is growing evidence that Russian military has been firing artillery into Ukraine territory and moving Russian tanks across the border. There also appears to be more clues that the Ukraine separatists were using Russian surface to air missiles, which they quickly drove back across the Russian border after the Malaysian Airliner was shot down. As if this wasn't bad enough the Ukraine government is on shaky ground. Two parties, the UDAR and the Svoboda parties quit the Ukraine coalition. This forces a new election, likely scheduled for October. The Ukraine Prime Minister also quit, causing more disruptions for the struggling Ukraine government. Meanwhile the markets are worried that the U.S. and Europe could come out with another round of tougher sanctions against Russia at any time.

The fighting in Gaza continues. Multiple parties have been lobbying for a ceasefire. U.S. Secretary of State John Kerry was pushing for a ceasefire but Israel didn't like his terms. The U.N. has been pushing for a ceasefire. Israel was poised to provide a temporary ceasefire for humanitarian efforts. Even Hamas proposed a ceasefire for the upcoming Eid al-Fitr holiday, which signals the end of Ramadan. Yet Hamas has continued to fire rockets, ignoring their own ceasefire terms and the Israelis have resumed their anti-terrorist operations in Gaza.

Currently the global equity markets continue to ignore the situation in Israel. However, will markets ignore another terrorist attack in Europe? Over the weekend Bloomberg news reported that Norway went on high alert over new evidence that suggested terrorists were plotting to attack the country in the very near future.

Investors should note that calendar. Traditionally August and September are the worst two month of the year for stocks. Lipper reported that stock funds saw outflows of $8.6 billion last week. Is that a sign that traders are already pulling money out of the market ahead of this seasonal slow period? One issue we have not heard much about is the upcoming U.S. midterm elections that are just three months away. As the democrats and republicans turn up the volume on their bullhorns it tends to sour investor and consumer sentiment.

We also need to be aware of another seasonal issue. Post-earnings depressing. It's quiet common to see stocks rally up to and immediately after their earnings report (if it's a good report). Then once the report is over stocks fade lower in a post-earnings depression. Momentum traders move their money out of the winners (and losers) and move it to the next potential pre-earnings runner. We are about half way through the Q2 earnings season. While the results have been better than expected thus far we could see a tired market struggle to maintain the up trend.

Keep in mind that the S&P 500 index has gone 1,027 days without a -10% correction.

James