A wave of optimism helped lift stocks to new highs last week. Hopes for a deal to solve the Greece situation, news of a cease-fire agreement in Ukraine, and improving economic data in Europe all contributed to the stock market's widespread gains. All of the major U.S. indices delivered gains last week with many breaking out to new highs. The NASDAQ composite hit levels not seen since the year 2000. The S&P 500 and the small cap Russell 2000 indices both closed at all-time highs.

Semiconductor stocks continue to show relative strength with the SOX index surging +4.95% for the week. Both biotech stocks and the oil-related stock indices added +3.0%. The U.S. dollar remains near 11-year highs but that didn't stop commodities from bouncing. Crude oil added +1.1% for the week to close at $52.65 a barrel. Brent crude is at $61.41 a barrel. Silver surged +3.7% to end the week at $17.32 an ounce. Gold slipped -0.5% to $1,227.90 an ounce. The yield on the U.S. 10-year note ended at 2.05% while the yield on a German 10-year bond closed at 0.31%.

Crude oil prices remain a hot topic. Oil production in the U.S. is poised to see a sharp slowdown with the number of active rigs still plunging. According to Baker Hughes the number of active rigs in the U.S. dropped -98 to 1,358. Active oil and gas rigs have fallen 572 from their recent highs. That's a -29.7% drop and the fastest decline on record.

The big drop in active rigs is adding to expectations for a bottom in oil prices. OPEC added to the mix with their announcement last week that they expect oil demand to rise +430,000 barrels a day to a total of 29.21 million barrels a day. Yet we are not seeing demand rise that much in the U.S. At least if we are seeing demand rise it's not outpacing supply. Our supplies are soaring. U.S. crude oil inventories rose another 4.9 million barrels to an 80-year high of 417.9 million barrels. The U.S. is quickly running out of places to storage oil and once storage is full the price of oil could see another plunge.

A recent CNBC story discussed the price of oil with Tom Kloza, chief oil analyst at Oil Price Information Service. Kloza suggested that WTI crude oil could drop toward the $30 a barrel range by the second quarter of 2015 but he is expecting a bottom before the first half of 2015 is over.

Economic Data

We did not have a lot of U.S. economic data last week. What we did get was disappointing. The retail sales numbers are not adding up. U.S. GDP is supposed to be improving but that could be in trouble since about 70% of GDP is consumer spending. For months we have been expecting consumers to spend their savings at the gas pump elsewhere but we are just not seeing any evidence of that. The January retail sales number dropped -0.8% following a -0.9% decline in December. However, it is important to note that most of that drop was likely due to lower gas prices at the pump. If you exclude motor vehicle sales, gasoline stations, and building materials, then the core retail sales number was up +0.2%.

Economists had been expecting a decline in the headline number but -0.9% was twice as bad as expected. Meanwhile the core retail sales number was barely positive after the fourth quarter of 2014 marked the strongest consumer spending growth since 2006. Another disappointment was the consumer sentiment data. The University of Michigan Consumer Sentiment survey released its preliminary February results. Analysts were expecting the survey to be unchanged from January's 11-year high of 98.1 Unfortunately the survey showed a drop to 93.6. It was the biggest miss versus the estimate on record.

It's possible that consumer sentiment was reacting to a bounce in gasoline prices, which have seen a 30-cent rebound per gallon from the recent lows. AAA reports the national average is back up to $2.25. That's still down from $3.33 a year ago but it's up sharply from a month ago. Inside the survey the current conditions component dropped from 109.3 to 103.1 and the expectations component declined from 91.0 to 87.5. Attitudes among consumers definitely deflated from the recent highs.

There was hope that spending might pick up around Valentine's Day, especially with the holiday on Monday, many workers have a three-day weekend. The National Retail Federation is estimating that Valentine's Day related spending could rise +9.2% from a year ago to $18.9 billion.

Overseas Economic Data

Overseas data was also quiet but what we did see what improvement. Japan said their machine tool orders surged +20% from a year ago. Meanwhile in Europe we see Germany reporting their Q4 GDP rose +0.7%. That's significantly better than consensus estimates of just +0.3% growth. It's also up significantly from Germany's Q3 growth of just +0.1%. This big improvement in Germany helped the Eurozone Q4 GDP hit +0.3%, which was above the +0.2% expectation.

The region is still struggling with deflation. Sweden is the newest country on a growing list that has cut their interest rates. Sweden's central bank surprised the market by lowering their repurchase rate from 0.0% to -0.1%. They announced a QE program of 10 billion krone. This move is designed to help the country fight inflation and devalue their currency. It's just one more shot in the currency war as everyone tries to devalue their currency to avoid deflation.

Greek Debt Crisis

Of course Greece was the main topic last week. The new Greek government is trying to keep their voters happy at home with fiery rhetoric about how they are going to fight austerity and roll back the rules imposed by the troika. At the same time they're trying to negotiate with their creditors and asking for more money, more time, and a better deal.

There was a rumor last week that the European Commission was going to give Greece a six-month extension on its deadlines but that story was quickly squashed by multiple sources. The Greece-EU talks last week failed to achieve any results. Meanwhile people have been withdrawing money out of Greek banks at an alarming rate. We're talking billions and billions of euros are racing out of Greek banks because people are afraid that if negotiations fail then Greece may impose capital controls.

Greece has a February 16th deadline to apply for a bailout extension because some Eurozone countries need to approve any additional bailout by their parliaments. The current bailout agreement expires on February 28th. The equity markets seem pretty sanguine about some sort of deal being reached, which is somewhat surprising. Greece currently has a debt of about €323 billion. About €240 billion of that is money from the various bailout programs over the last few years. The European Central Bank owns about 6% of Greece's total debt. The IMF has about 10%. The largest creditor is the Eurozone with about 60% of Greece's €320 billion debt.

Right now there is no way Greece can pay off its debt. At €320 billion that's 174% of Greek GDP. After years of austerity their economy is in tatters. Unemployment is sky high. They can't even pay the interest on their current debt. It would be much better for Greece to leave the Eurozone and just default. However, Germany wants to keep Greece in the Eurozone, which would keep the euro weak and that benefits Germany's export-driven economy. Besides, joining the Eurozone was supposed to be a permanent, no going back sort of deal. If Greece is allowed to exit then Spain and Italy might decide it is better for their countries to exit as well since their debts are so high. Unfortunately the Eurozone is sort of damned if they do and damned if they don't with Greece. If they keep Greece in the Eurozone by adjusting the terms and conditions on its debt then struggling countries like Portugal, Italy, Ireland, and Spain (the rest of the PIIGS countries) will also want to renegotiate their debt details.

Right now negotiations between Greece and the Eurogroup are scheduled to continue on Monday, February 16th. The Eurogroup chief Jeroen Dijsselbloem said he was "very pessimistic" about any serious deal being achieved. At the same time, as of Sunday, Greek is still optimistic that a deal will get done. Stocks investors seem to be betting on a deal as well. The Europe 600 stock index hit seven-year highs this past week. The German DAX index traded above 11,000 for the first time ever just a couple of days ago.




Major Indices:

The big cap S&P 500 index has produced a nice rally from its early February lows near 1,980. Last week saw a +2.0% gain and a breakout past its December highs. That means the index is now up +1.8% for the year and closed at new all-time highs.

Technically you could argue that the S&P 500 is short-term overbought and due for a dip. You could also argue that the six-point close above its 2014 high is not much of a breakout - at least not yet. The 2,100 level is potential round-number resistance. I'd probably put the party hats away until we see a strong close above the 2,100 level.

Depending on where you want to draw your support lines the S&P 500 might have short-term support at 2,080, 2,070, or 2,065. The S&P 500 also has a trend line of higher highs that traders should be aware of.

chart of the S&P 500 index:

Weekly chart of the S&P 500 index

The NASDAQ composite delivered the strongest performance among the major U.S. indices. It rallied +3.1% last week, which boosted its 2015 gain to +3.3%. The breakout past resistance in the 4,800 area is very bullish, especially after weeks of consolidating sideways. Suddenly everyone is talking about the NASDAQ's all-time high, which was set back in March 2000 around the 5,130 level. That's only another +5% move higher from current levels. Of course the NASDAQ has to rally through the 5,000 level first and that could be tough round-number, psychological resistance. On a short-term basis you could argue the NASDAQ is oversold with a +6% bounce from its early February low.

chart of the NASDAQ Composite index:

Weekly chart of the NASDAQ Composite index

The small cap Russell 2000 index ($RUT) rallied +1.47% last week. The rise past its December highs near 1,220 leaves the index at a new all-time high. It's probably too early to call this a true breakout. A reversal here would feel like a bearish double top. I do find the strength in the $RUT encouraging. After underperforming the big cap indices last year the $RUT could be poised to outperform. It's hard to pick where overhead resistance could be but I suspect somewhere in the 1,240-1,260 area.

chart of the Russell 2000 index

Weekly chart of the Russell 2000 index



Economic Data & Event Calendar

The U.S. markets are closed on Monday for President's day. Meanwhile the pace of economic data picks up in the U.S. We'll see two regional Fed surveys with New York and Philadelphia reporting. The PPI will give us another look at inflation on a wholesale level. The FOMC minutes could influence market trading as investors try to determine when the Fed might start raising rates.

Economic and Event Calendar

- Monday, February 16 -
U.S. markets are closed (President's day)
Eurogroup & Greece negotiations.

- Tuesday, February 17 -
New York Empire State manufacturing survey
NAHB housing market index

- Wednesday, February 18 -
Housing starts and building permits
FOMC minutes
Producer Price Index (PPI)
Industrial Production

- Thursday, February 19 -
Philadelphia Fed survey

- Friday, February 20 -
(nothing significant)

Additional Events to be aware of:

Feb. 24th - Fed Chairman Yellen's semiannual testimony before congress. Mar. 18th - Federal Reserve policy update
Mar. 18th - Fed Chairman Yellen press conference

Looking Ahead:

Greece wasn't the only big story last week. Ukraine was making headlines. Heads of state from Germany and France helped negotiate a new cease-fire deal between Ukraine and Russia. These talks took 16 hours to finally agree on terms. This new cease-fire was supposed to start on midnight Saturday night (February 15th). This sparked fierce fighting over the last 48 hours as both the Ukraine forces and rebel forces tried to gain new ground before the cease-fire started since whatever they controlled by Saturday night would determine where the dividing line would be drawn.

Sadly as of Sunday the fighting continued. However, reports suggest that the intensity of the conflict definitely subsided. The question now is if this cease-fire will hold. Essentially it's almost the same deal proposed back in September, which did not work. There has been speculation in the West that the fighting will not stop until Russia has a land bridge to its new annexed region of Crimea. Currently the rebels do not control enough territory to reach from Russia to Crimea. It would appear that both sides are using the cease-fire to bolster their positions.

Cautious Analysts

The U.S. market is breaking out to new highs so you might expect a lot of optimism on Wall Street. Oddly enough the last few days have seen more cautious comments coming from market pundits. An analyst at Credit Suisse just lowered their midyear S&P 500 price target from 2,250 to 2,100. They also lowered their yearend target to 2,150. Their concern was earnings growth expectations and geopolitical risk.

Another firm, this time UBS, said the market was risky and they were suggesting clients reduce exposure to stocks due to geopolitical and global economic risks. In the case of putting your money where your mouth is the widely followed Appaloosa Management hedge fund, guided by David Tepper, significantly reduced their exposure to stocks from $6.74 billion down to $4 billion. They completely exited their positions in Apple Inc. (AAPL), Alibaba (BABA), Citigroup (C), Facebook (FB), Ford (F), and Halliburton (HAL). That's in addition to selling all their shares of the SPY S&P 500 ETF.

Market

The U.S. market's trend the last two weeks has been bullish. It's hard to deny the bullish breakout in the NASDAQ. The new highs in the S&P 500 and the Russell 2000 need to see some follow through or we're going to worry about a potential bearish double top. Bears could argue that corporate guidance during the recent Q4 earnings season was way too cautious. They have a point. Guidance was pretty anemic. Yet stock prices have continued to climb. There appears to be some sort of disconnect between what corporations are telling us and what investors believe. Or it's possible investors just don't care. The U.S. is still the best house in a bad neighborhood.

Tonight my concern remains Greece. The next two weeks will be filled with brinksmanship between the new Greek anti-austerity government and its creditors in Europe. If they fail to come to some sort of deal then Greece could be forced to leave the Eurozone. That could shatter market confidence even through Greece is such a small part of the Eurozone. The deadline to watch will be February 28th. If we see a deal or some sort of extension then stocks could breathe a sigh of relief and continue higher.

On a technical note the current bull market is about to hit its sixth year anniversary. We are just about three weeks away from its March 9th anniversary. The average bull market lasts about 165 weeks. This bull market is about 309 weeks old.

~ James