The trend of rising stocks, a rising dollar, and falling commodities continued last week. The S&P 500 and the Dow Industrials both ended Friday at new all-time highs. Just about every sector posted gains for the week. The exception remains the small cap index. The Russell 2000 stuck out like a sore thumb with a -1.1% weekly decline.

The rising U.S. dollar continues to pressure commodity prices. Crude oil, gold and silver all posted another week of losses. Silver broke down to lows not seen since early 2010. Meanwhile the U.S. dollar is on track for its longest rally since 1967.

Chart of the U.S. Dollar index (UUP)

There were three main stories last week. We had the FOMC meeting, the Scottish vote on independence, and the Alibaba (BABA) IPO on Friday. We will talk about the FOMC meeting in a moment. The vote in Scotland had serious implications for the United Kingdom and after going into the vote with the yes and no camps both near 50/50 it was a nail biter. By the end of the day the no vote won 55-45 in favor of staying in the United Kingdom. Those seeking independence blamed the over 60 crowd for not wanting to disrupt their national insurance benefits (a.k.a. social security).

We had the FOMC meeting conclusion on Wednesday. The Scottish vote on Thursday. Friday was Alibaba day - all day long. It was the biggest IPO event in history. The night before they raised the IPO price from the mid $60s to $68. The IPO was oversubscribed by a factor of 10. The underwriters boosted the number of shares to 368.1 million. The stock's first trade (symbol: BABA) was $92.70. Shares almost hit $100 on the initial surge. Midday BABA fell back toward $90.00 before bouncing back into the closing bell for a one-day gain of +38%.

Chart of the Alibaba's first day (BABA)

Economic Data

The two-day federal reserve open market committee (FOMC) ended on Wednesday. As expected the Fed did not alter interest rates and they announced another $10 billion taper to their asset buying program. That leaves just $15 billion a month left in their QE program and most believe the Fed will announce the end of QE at the next meeting in October. The prior two weeks there was speculation that the Fed might remove its "considerable time" language. However, prior to the meeting the tide had change and analysts were expecting the Fed to keep this language in their policy statement, which they did. This helped soothe the market since it means the first rate hike is not imminent and probably in mid 2015.

The economic data in the U.S. last week was mixed. The consumer price index look at inflation (the CPI) dropped -0.2% in August, mainly due to falling energy prices. The New York Empire State Fed manufacturing survey soared from 14.7 in August to 27.5 in September. This is the highest reading since October 2009. Yet the Philly Fed survey dropped from 28.0 in August to 22.5 in September, which was worse than expected.

The NAHB housing market index improved from 55 in August to 59 in September. This same enthusiasm was not evident in the monthly housing starts and building permit data. Housing starts dropped from a seasonally adjusted annual pace of 1.117 million in July to 956,000 in August, that's a -14% drop. Building permits were adjusted from a 1.05 million pace in July to 998K in August.

In positive news the price of gasoline continues to fall inside the U.S. The latest data showed a -4.1% drop month over month. The national average on Friday morning was $3.36 a gallon. That's down 16 cents from a year ago. The chief analyst at GasBuddy.com is predicting that the national average could fall into the $3.15 to $3.25 a gallon range by Halloween, which could be a new four-year low. The same analyst is forecasting that we could see gas priced at or below $3.00 a gallon by Christmas time. There are already 17 states with gas near $3.00 a gallon and it could widen to 30 states by yearend. This is a huge bonus for the U.S. consumer and will likely be a nice boost for retailers. Every one cent drop in gasoline prices makes another $1 billion worth of consumer spending money available for other purchases in the U.S.

Overseas Economic Data

Overseas data was mostly negative. The Organization for Economic Co-operation and Development (OECD) lowered their 2014 GDP forecast for the U.S. from +2.6% growth down to +2.1% growth. They also lowered their forecast on the European Union from +1.2% growth to +0.8%. It was a really quiet week for economic data out of Europe. Everyone was focused on the Scottish vote for independence anyway. Most of the headlines were coming out of Asia.

Japan lowered its economic forecast for 2014 as consumer spending has failed to recover once the government started a new spending tax in April this year. China reported its industrial production only rose +6.8%, which was below expectations and marked its slowest pace since December 2008. Retail sales in China rose +11.9% year over year, which looks strong but still below forecasts. China also reported that foreign direct investment declined from -0.4% to -1.8%. The country made the decision to inject 500 billion Yuan into the banking system last week, which doesn't project a lot of confidence. The latest housing price report in China showed that 68 out of 70 cities reported a drop in home prices.




Major Indices:

The large cap S&P 500 index added +1.25% for the week and closed at a new all-time high. This has boosted its year to date gain to +8.8%. The index almost hit 2,020 on Friday before paring its gains. A breakout past 2020 probably sets up for a run toward the 2040-2050 zone. If stocks weaken then the 1980 level is still short-term support. The bottom of its bullish channel on the weekly chart should also offer support in the 1950-1960 zone.

chart of the S&P 500 index:

Weekly chart of the S&P 500 index

As expected the NASDAQ found support near the 4,500 area. The index has bounced back toward resistance near 4,600 and closed near new 14-year highs. For the week the NASDAQ only added +0.27% but it's year to date gain is +9.7%.

A breakout past 4600 probably signals a run toward 4700. If the 4500 level fails as support then I would expect a drop toward the 4300 area, which would line up with the NASDAQ's long-term trend line of higher lows (see weekly chart below).

chart of the NASDAQ Composite index:

Weekly chart of the NASDAQ Composite index

The small cap Russell 2000 index continues to underperform. The $RUT lost -1.1% last week, which puts its 2014 gains at -1.6%. The index is down three weeks in a row and just closed under several key moving averages. The early September high looks like a lower high. For the moment the long-term trend for the $RUT still has higher lows but if that changes and we see a new lower low it would be bearish. In the mean time the $RUT is stuck inside a wide range from support near 1080 to resistance near 1210.

chart of the Russell 2000 index



Economic Data & Event Calendar

This week we will hear from two more federal reserve regions: Chicago and Richmond. Their activity and manufacturing surveys will lead the week. Later on the third estimate on U.S. Q2 GDP growth will come out on Friday. Estimates are rising. Consensus estimates are suggesting a revision up to +4.3% growth last quarter but some economists are estimating +4.8% growth. These seems pretty optimistic. Keep in mind the OECD just lowered their 2014 GDP estimates on the U.S. a few days ago.

We are less than three weeks away from Alcoa (AA) kicking off the Q3 earnings season on October 8th.

Economic and Event Calendar

- Monday, September 22 -
Existing home sales
Chicago Fed national activity index
HSBC China manufacturing PMI data

- Tuesday, September 23 -
Richmond Fed manufacturing survey
Eurozone PMI data

- Wednesday, September 24 -
New Home Sales

- Thursday, September 25 -
Weekly Initial Jobless Claims
Kansas City Fed manufacturing survey
Durable Goods Orders

- Friday, September 26 -
Q2 GDP estimate (third estimate)
University of Michigan Consumer Sentiment

Additional Events to be aware of:

Looking Ahead:

Looking out at the rest of the year (about 16 weeks left) the situation in the U.S. does seem to be improving. I am encouraged by the falling price of gasoline and what that should do for consumer spending. We're approaching the holiday season and that means seasonal employment will pick up. Retailers will be hiring more people, deliver companies like UPS and FedEx will higher tens of thousands of seasonal workers. Walmart (WMT) said they plan to hire about 60,000 people for the holiday season, which is a +10% jump from last year.

Ebola Outbreak

One thing we do want to keep an eye on is the Ebola outbreak. Last week the United Nations (UN) called the world's worst Ebola outbreak currently happening in Africa a threat to international peace and security. The UN health chief, Dr. Margaret Chan, said, "This is likely the greatest peacetime challenge the United Nations and its agencies have ever faced." The UN held an emergency meeting last week and 130 countries approved it.

World powers need to move fast. The number of infected is doubling every three weeks. The CDC is warning that over 500,000 people could be infected by January 2015. Sierra Leone is trying to curtail the spread of the virus with a nationwide three-day curfew. They're asking all six million citizens to stay indoors through the weekend. The U.S. CDC is estimating an 18% chance the virus makes it to the U.S. in the next three months. This is why investors may want to keep an eye on the issue.

It is conceivable that if the Ebola virus jumps to the U.S. it will have an impact on consumer spending. Right now the U.S. economy seems to be picking up speed. If suddenly there is an outbreak in the U.S. we could see fear keep consumers indoors.

Geopolitics

Another reason stocks were able to rally last week was the lack of geopolitical headlines. Stories about ISIS and the simmering conflict in Eastern Ukraine with Russia were missing from the front page news. That could change. Russian President Putin was flexing his military muscles the last week and we're just now hearing about it.

Russian military planes, many of them bombers, were intercepted in international airspace last week. Six Russian planes were intercepted in Alaskan airspace. Two Russian bombers crossed into Canadian air. Two more Russian bombers were intercepted in Dutch airspace. There were another two Russian bombers encountered over Scotland's airspace. Sweden said they intercepted two Russian bombers in their air. The U.S. said there were 16 interceptions of Russian military planes in U.S. airspace in a ten-day period in August.

Clearly Putin is trying to show the world he isn't afraid of anyone. Like a bully he was caught threatening that the Russian army could be in Kiev in two days if they wanted to. Not only that Putin said Russia could claim the capitals of Latvia, Lithuania, Estonia, Poland, and Romania in a matter of days.

At the moment Russia's slow-motion invasion of Ukraine is not affecting the markets but that could change if Putin gets greedy. The combination of Russian aggression, ISIS, and all the other threats have turned the world a lot more dangerous. According to James Clapper, the Director of National Intelligence, said, "The United States is facing the most diverse set of threats I've seen in my 50 years in the intelligence business."

Market

Thankfully the U.S. equity market continues to shrug off just about everything. The large cap indices are hitting new highs. The transports are leading the charge. Financials are showing strength again. Semiconductor stocks are flirting with 14-year highs. The big picture trend for stocks is higher.

I will note that on a short-term basis we might see some profit taking. Friday's session looks short-term bearish. We noticed a lot of one-day bearish reversal patterns on Friday. That could mean the rally is a little bit tired. If we see a pullback in the next week or two I would use it as a new bullish entry point. Although you may want to wait until mid October before launching new positions.

James