Last week's market was driven by economic data overseas and foreign central bank action. Japan fell back into recession with a widely unexpected drop in GDP growth. Yet the U.S. market remains resilient. Surprise news that China's central bank cut rates help spur equities higher on Friday. Meanwhile the European Central Bank President Mario Draghi continues to issue dovish comments telling the markets he is ready to do whatever it takes to save the Eurozone. Stocks reacted with gains. The S&P 500 posted a +1.1% gain on the week. That's the fifth weekly gain in a row and the best five-week rally since April 2009.

Both the S&P 500 and the Dow Jones Industrial Average closed the week at new record highs. The NASDAQ extended its gains while the small cap Russell 2000 struggled and posted a weekly loss. Transports continued to rally and the Dow Jones Transportation Average is now up +22.8% for the year. The semiconductor stocks showed relative strength with the SOX index up +2.69% on the week, which boosted the index's 2014 gains to +23.9%. Biotechs rallied as well with a +2.7% weekly gain and a stellar +43.4% 2014 gain.

The U.S. dollar continued to rally as the Japanese yen and the EU's euro sinking lower. Commodities bounce in spite of the dollar's strength. Crude oil rose nearly +1% for the week and that inspired big bounces in the oil and oil service stocks. The OIX was up +3.3% and the OSX index was up +2.29%. Yet crude oil, the OIX, and the OSX all remain in negative territory for the year. Crude oil is down -22% in 2014 and closed near $76.50 a barrel on Friday.

Overseas Economic Data

We are going to look at overseas data first. China's HSBC manufacturing index slipped to a six-month low to close right at the 50.0 mark. That is the dividing line between growth and contraction. The latest data on China's real estate market showed house prices fell -2.6% following a -1.3% decline. The country has fallen to its slowest rate of growth since 1990. Leaders are despite to stop the slide.

On Friday the People's Bank of China (central bank) surprised everyone by cutting rates. They reduced the deposit rate by 25 basis points to 2.75% and they cut the one-year lending rate by 40 basis points to 5.6%. It was the first rate cut by the PBOC since July 2012.

China isn't the only Asian country that's dealing with a slowdown. Japan is now officially back in recession. Economists were expecting Japan to see +0.5% GDP growth in the third quarter. Unfortunately the latest report unveiled a -0.4% decline in Q3 GDP. That follows a -1.9% contraction in Japan's second quarter. Year over year GDP growth was -1.6% versus estimates for +2.1%. Japan's government has canceled a proposed tax increase scheduled for 2015 following these disappointing economic numbers.

Regular readers in this newsletter already know that Europe is really struggling with slow or negative growth. Last week's numbers didn't help. Germany's manufacturing PMI dipped from 51.4 to 50.0. France's manufacturing PMI fell from 48.5 to 47.6. The regional Eurozone manufacturing PMI declined from 50.6 to 50.4. Numbers below 50.0 suggest economic contraction and they're all declining.

ECB President Draghi is desperately worried the EU could fall back into recession (some of the EU countries are already in recession). Draghi spoke at a conference in Germany last week saying, "We will do what we must to raise inflation and inflation expectations as fast as possible, as our price-stability mandate requires." Draghi noted that inflation readings in the EU have fallen too low. The market is interpreting his words in the last couple of weeks to mean the ECB is on the verge of launching a more powerful form of QE to stimulate the economy. The next ECB meeting is about two weeks away.

Economic Data

Back home in the U.S. the economic data was mostly bullish. The headline consumer price index (CPI) was flat (+0.0%) while the core CPI rose +0.2%. The wholesale gauge for inflation, the producer price index (PPI), rose +0.2% in October and the core PPI was up +0.4%.

Real estate data was good. The weekly mortgage application index saw the applications to purchase a home surged +11.7%. The annual pace of existing home sales hit 5.26 million. That was better than expected and up from September's 5.18 million. The NAHB home builder sentiment index came in better than expected with a rise from 54 to 58.

We also had a few regional Federal Reserve surveys. The New York manufacturing index dipped below expectations at 10.2. Yet the Kansas City Fed manufacturing survey rose from 4.0 in October to 7.0 in November. The Philadelphia Fed survey was a huge surprise. Analysts were expecting the Philly Fed number to drop from October's 20.7 to 18.3. Yet November's reading surged to 40.8. That is the biggest one-month rise since 2009 and the highest level since 1980. Immediately market pundits called it an aberration and forecasted it will likely reverse sharply lower in December.




Major Indices:

The S&P 500 managed yet another again and continues to grow more overbought. The big cap index is up five weeks in a row. It's also up 243 points from the mid October low of 1820. That's a +13.3% move. Without a doubt this index is very overbought and due for a pullback. Yet part of the magic of the market is that stocks can always remain overbought (or oversold) a lot longer than anyone thinks is normal.

We can look for the 2040, 2020, and 2000 levels to act as possible short-term support. Overhead resistance is most likely 2080 and 2100. Year to date the S&P 500 has extended its gains to +11.6%.

chart of the S&P 500 index:

The NASDAQ continued to rally and managed to breakout past recent resistance in the 4700 area. These are new 14-year highs for the tech-heavy index. The 4750 and 4800 levels are likely overhead resistance. Very short-term support would be 4700 but I would focus on 4600 as the support level to watch. Year to date the NASDAQ is up +12.8%.

chart of the NASDAQ Composite index:

The small cap Russell 2000 index has not been seeing the same strength as its large-cap peers. The $RUT actually posted a loss for the week. Although if you're feeling optimistic it did bounce from the 1150 level and Thursday's session was technically a bullish engulfing candlestick reversal pattern.

The 1185-1190 zone has turned into new resistance. If the $RUT can breakout higher it could race toward its 2014 highs in the 1210-1215 area. The $RUT is definitely underperforming the large cap indices with a +0.7% gain in 2014.

chart of the Russell 2000 index



Economic Data & Event Calendar

The last trading week for November 2014 will see more data on the U.S. housing market. Yet the only economic event that might be considered a market mover is the U.S. Q3 GDP estimate that comes out on Tuesday. Economists are expecting the previous Q3 estimates of +3.5% growth to be revised down into the 2.9% to 3.1% range.

The real events for the week are likely overseas. Monday, November 24th is the deadline for the Iran nuclear talks. Thursday is the next Organization of the Petroleum Exporting Countries (OPEC) meeting.

The Iran talks will ratchet up the geopolitical tensions for the market. These talks have been going on for years and Iran always delays and there is never any real progress because the country wants nuclear weapons. Meanwhile the P5+1 nations (United States, Russia, China, United Kingdom, France, and Germany) do not want Iran to get nuclear weapons although Russia and China are dubious allies in these talks, especially now with Russia's aggression in the Ukraine.

As you might expect the OPEC meeting could influence the price of crude oil. Thursday's meeting is to discuss production quotas. Do they cut production to try and lift oil prices from four-year lows or do they leave production unchanged and try and starve out the shale-oil industry inside the U.S.?

Bloomberg polled 20 energy analysts and they are evenly split down the middle on what OPEC will do. They would dearly love to price the shale-oil producers in the U.S. out of the market but to do that they need to see oil prices fall even farther. There is talk oil could drop toward $60 a barrel. Of course if they don't cut production these countries will continue to lose billions of dollars from depressed oil prices.

Let's not forget that the U.S. markets are closed on Thursday for the Thanksgiving holiday and they close early on Friday at 1:00 p.m.

Economic and Event Calendar

- Monday, November 24 -
Iran nuclear talks deadline

- Tuesday, November 25 -
U.S. Q3 GDP estimate
Richmond Federal Reserve regional survey
Case-Shiller 20 city home price index
Consumer Confidence survey

- Wednesday, November 26 -
Durable Goods Orders
Personal Income & Spending
Chicago PMI
New Home Sales
Pending Home Sales

- Thursday, November 27 -
OPEC meeting
U.S. market closed for Thanksgiving

- Friday, November 28 -
U.S. markets close early (at 1 p.m.)

Additional Events to be aware of:

December 17: FOMC meeting

Looking Ahead:

As we look ahead the economic picture is unchanged. We already knew that Europe was slowing down and on the verge of recession. We already knew that China was slowing down and growing at its slowest pace in years. We already knew that Japan was struggling and that's why the Bank of Japan announced its record-breaking stimulus program on Halloween.

The U.S. economy continues to look like the best house in an ugly neighborhood. The U.S. market's new highs illustrate that global investors are aware of this and putting their money into the U.S. However, we are severely overbought with the U.S. stock market in a nearly non-stop rally from its October lows (with the exception of the small cap Russell 2000).

On the plus side we have central banks willing to keep the QE party going. The U.S. Federal Reserve has officially ended its QE program but it's still replacing any U.S. bonds they own as they expire, which is an under the radar form of QE. We have Japan desperately trying to stimulate their economy with massive QE. China just cut rates. Now we expect Europe to announce stronger QE measures.

What worries me now is the geopolitical picture, which has been quiet lately. Fighting continues in Ukraine between Russia, Russian-backed rebels and Ukraine forces. We just don't see it on the front page any more. Russia is growing increasingly belligerent. The North Atlantic Treaty Organization (NATO) has had to scramble their military jets more than 400 times this year to counter Russian incursions into Europe's airspace. That's up more than 50% from last year. As we move deeper into winter, a winter that will likely be as bad or worse than last year's extremely cold winter, we could see Russia use their natural gas exports as an economic weapon against Europe.

Another challenge is the Iran nuclear talks I mentioned earlier. The head of the United Nation's nuclear agency, the International Atomic Energy Agency (IAEA), said that Iran will not explain their constant exploration toward nuclear weapons. Iran has been pulling the wool over the eyes of the West for years and they're not going to stop now. What's scary is the country's leaders have already said they will attack Israel once they get nukes. Israel believes them and this weekend an article in the Jerusalem Post said the Israeli government is once again considering military action aimed at Iran's nuclear facilities. If we see fighting break out over this issue it's going to turn the hostilities in the Middle East up to eleven*! Fortunately for investors the U.S. market has been ignoring geopolitical issues all year long so there is no reason for it to start now although if Israel bombs Iran that could change the game.

Not to sound like a broken record but on a short-term basis the U.S. large cap indices are overbought and way overdue for some profit taking. The good news is that any dip should be bought. The average hedge fund is still down -1% in 2014. That's amazing when you consider the S&P 500 is up +11.6% this year. What's more amazing is that the average hedge fund has underperformed the U.S. market six years in a row. What that means for us is money managers will be chasing performance throughout the rest of this year.

We only have about 31 shopping days left until Christmas. Big name retail stocks like Wal-Mart (WMT) and Target (TGT) have been soaring recently. According to CNBC personality Jim Cramer there is a bull market in shoe stocks as Nike (NKE) leads the industry higher. There seems to be a generally optimistic tone as we head into the holiday shopping season. However it will still be a war among the retailers fighting for every consumer dollar. Williams Sonoma (WSM) and Best Buy (BBY) both noted that this season will be very promotional (a.k.a. heavily discounted) and it will be a tough environment for retailers, especially as they fight with online rivals.

Speaking of online shopping, the media has convinced us that Cyber Monday, the Monday after the Thanksgiving weekend (and after Black Friday), is the best time to buy stuff online. Yet that may not be true. According to Adobe's 2014 Digital Index Online Shopping Forecast the best day might be Thanksgiving itself. Adobe's forecast estimates that prices will be discounted 24% on Thanksgiving versus 23% on Black Friday and only 20% on Cyber Monday.

Happy shopping and count your blessings! We have much to be thankful for.

~ James


* "up to eleven" is a Spinal Tap reference.