The market's upward momentum paused last week. We did see the major indices hit new highs but equities drifted lower toward the weekend. February turned out to be pretty good if you were bullish on stocks. The Dow Jones Industrial Average rose 968 points. That's was almost enough to mark its biggest one-month point gain in history. The big cap S&P 500 index rose more than 5% and the NASDAQ soared +7% in February, making it the best month for stocks since October 2011.

Part of the reason for stocks fading lower was profit taking in Apple Inc. (AAPL). This stock is twice as big as the next biggest company with a market cap above $740 billion. Shares of AAPL had soared from $105 in mid January to $133 on Monday, February 23rd. As the biggest component in the S&P 500 and the NASDAQ, AAPL's weakness added some extra wind resistance to the market's surge higher.

The U.S. dollar had an up week and that put pressure on commodities. After consolidating sideways the prior three weeks the dollar looks poised to breakout to new multi-year highs. The combination of dollar strength and vanishing storage should be increasing pressure on oil prices. U.S. oil inventories jumped another +8.4 million barrels to 434 million, which is a new 80-year high. Crude oil lost more than $1.50 to close back under $50 a barrel.

We also saw the number of active oil rigs in the U.S. decline for the 12th week in a row. The rig count dropped -43 down to 1,267 rigs. We're not down -664 rigs from the September high of 1,931. Eventually this decline in active rigs will impact U.S. oil production but that could be another three to four months away before production actually declines. The weakness in oil has OPEC worried and there was some chatter that OPEC might call an emergency meeting if oil continues to slide.

Economic Data

We had a lot of economic data to wade through last week. The pace of new home sales in the United States was essentially unchanged with a -0.2% decline to 481,000 in January. It was a different story with the pending home sale index, which rose +1.7% to 104.2. This is a bounce from December's -1.5% decline. Unfortunately, January's rebound came in below expectations as analysts were looking for a bounce +3.4%. Existing home sales fell off a cliff with a -4.9% drop, significantly below expectations. Meanwhile the Case-Shiller 20-city home price index rose +4.5% in December following November's +4.3% increase.

Believe it or not but we are seeing deflation in America. The consumer price index (CPI) dropped -0.7% in January after a +0.3% rise in December. This is the biggest one-month drop in over six years. It's the year over year drop of -0.1% that's ringing the deflation bell. We can thank plunging gasoline prices for the decline. January saw gasoline prices slide -18.7% after a -9% drop in December.

Durable goods orders in January rose +2.8% following December's downwardly revised -3.7% reading. Aircraft orders were the main driver for the gain. Excluding the aircraft category our durable goods rose +0.3%, which was below expectations.

The Dallas Fed manufacturing index dropped from -4.4 in January to -11.2 in February. This was significantly below expectations for an improvement to -4. Numbers below zero suggestion contraction.

The trend of disappointing economic data continued with the Chicago PMI, which crashed from 59.4 in December to 45.8 in January. Numbers below 50.0 suggest economic contraction. Economists were expecting a minor decline to 58. Nearly every component in the Chicago PMI saw double-digit declines. This is the first contraction reading since April 2013.

Unfortunately, we have seen a very frustrating trend of bearish manufacturing data. Since February 17th we've seen the New York Empire State manufacturing survey, the Philly Fed business outlook, the Dallas Fed manufacturing index, the Richmond Fed manufacturing index, the Kansas City Fed manufacturing activity index, the Institute for Supply Management index for Milwaukee, and the Chicago PMI all come in below estimates.

The above trend does not bode well for Q1 GDP growth. Last week the second estimate on U.S. Q4 GDP was released. Growth was revised lower from the initial estimate of +2.64% down to +2.19%, which is a far cry from 2014's Q3 GDP of +4.9%. On the plus side the +2.19% reading was actually above estimates since analysts had turned cautious and were expecting a drop to +2.0%.

The final reading for February's Consumer Sentiment survey was adjusted higher from 93.6 to 95.4. We're not that far away from January's reading of 98.1, which is an 11-year high.

The big event last week was Federal Reserve Chairman Janet Yellen's two-day testimony before congress. Twice a year the Fed chief speaks to congress and has to endure some Q&A with politicians. Speaking to the Senate Banking Committee, Yellen promised that the Fed was in no rush to raise rates. The FOMC is still worried about low inflation and slow wage growth in the U.S. She also said the Fed would adjust their forward guidance before actually hiking rates. That means no surprise rate hikes, which should make the market happy since the Fed will clearly telegraph their moves before they make them.

In the good news category the West Coast port standoff appears to be solved. The ports got back to work on February 20th after the dockworker labor union and the port management finally reached an agreement on a new five-year deal on February 20th.

Overseas Economic Data

The U.S. market is not the only one hitting new highs in February. Stocks markets in Sweden, Britain, and Germany all hit new record highs. Japan saw its market reach new 15-year highs. Speaking of Japan they continue to struggle with deflation. The country said its CPI data dropped to a ten-month low. Meanwhile the China HSBC manufacturing PMI came in better than expected with a rise from 49.7 to 50.1. Analysts were expecting a decline. The 50.0 market is the dividing line between growth and contraction.

Last Monday Europe anxiously waited for Greece to deliver their list of reforms to satisfy the troika. Without these proposed reforms the prior week's four-month loan extension would not be accepted. Of course the key word there is "proposed" reforms. There are no guarantees. Germany's latest estimate on GDP growth was unchanged at +0.7% for 2014 Q4. The Eurozone Business and Consumer survey improved from 101.4 to 102.1, which was better than expected. Italy also saw its confidence number improve with their business confidence survey rising from 97.6 to 99.1. Meanwhile the United Kingdom said its 2014 Q4 GDP rose +0.5% from the prior quarter.

Most of Europe is still struggling with deflation. France said its producer price index (PPI) dropped -0.9% last month. Spain's CPI fell -1.1% and its PPI declined -2.8%. The Eurozone consumer price index (CPI) slipped -1.6% last month.




Major Indices:

The S&P 500 index tagged a new record high before retreating last week. It looks like the 2,120 level is now short-term resistance. Friday's close below its simple 10-dma is technically short-term bearish. If the 2,100 level doesn't hold then I would expect the S&P 500 to pull back into the 2,085 region. Year to date this index is up +2.2%.

chart of the S&P 500 index:

The NASDAQ delivered a very strong performance in February. The rebound from its February low near 4,580 turned into a surge toward 5,000. While the NASDAQ did not hit a new high this is a new record for a closing high on a monthly basis. Last Tuesday saw the NASDAQ post its tenth daily gain in a row, which hasn't happened since July 2009.

Last week I cautioned readers that we could see the NASDAQ spike towards 5,000 and then retreat. This is a big round-number, psychological level could be tough resistance to break through. Currently the NASDAQ is up four weeks in a row and definitely short-term overbought.

There is no clear support at these levels. If the market declines the NASDAQ could easily drop toward 4,900. Odds are the 4,800 area is the only significant support at the moment. Year to date this index is up +4.8%.

chart of the NASDAQ Composite index:

The NASDAQ wasn't the only one to see a multi-day streak. The small cap Russell 2000 index also made it ten up days in a row before posting a down day. These are record highs for the $RUT. Broken resistance at 1,220 is probably the closest support. However, if the market really retreats lower I would expect a dip closer to the 1,200 mark for the $RUT. Thus far this small cap index is up +2.4% in 2015.

chart of the Russell 2000 index



Economic Data & Event Calendar

It's a big week for economic data. We'll see the U.S. ISM and ISM services indices. The ADP report midweek will set us up for Friday's jobs report. Economists are expecting the nonfarm payroll report to be relatively flat in the +250,000 job region. One has to wonder if another cold February threw a wet blanket on corporate hiring. The Beige Book will provide anecdotal updates from the 12 regional districts.

We'll also see the Eurozone GDP estimate late in the week. The ECB central bank meeting will generate more headlines about European deflation and possibly the Greek debt crisis. The main focus will probably be the ECB's new QE program that is supposed to start in March. ECB Preside Draghi will hold a press conference afterward.

Economic and Event Calendar

- Monday, March 02 -
Personal Income & Spending
ISM index
Construction spending

- Tuesday, March 03 -
Auto & Truck sales for February

- Wednesday, March 04 -
ADP Employment Change Report
ISM Services index
Federal Reserve Beige Book

- Thursday, March 05 -
European Central Bank (ECB) interest rate decision
ECB President Mario Draghi press conference
Factory Orders

- Friday, March 06 -
Nonfarm payroll (jobs) report
Unemployment rate
Eurozone GDP estimate

Additional Events to be aware of:

Mar. 18th - Federal Reserve policy update
Mar. 18th - Fed Chairman Yellen press conference

Looking Ahead:

Looking ahead a big story this week will be Israeli Prime Minister Benjamin Netanyahu's speech before the U.S. congress. This has been a big story in Washington. Weeks ago when it first surfaced that Netanyahu had accepted a Republican invitation to speak to members of congress it sparked outrage from the White House, who claimed a major breach of protocol.

Netanyahu wants the U.S. to reaffirm its commitment to prevent Iran from achieving nuclear weapons. If you're not familiar with this story Iran has been working on developing its nuclear program for decades. Israel is worried they are trying to make weapons. Iran denies it and claims it's for peaceful, energy-producing purposes. It's worth noting that multiple Iranian leaders have promised to destroy Israel. Plus Iran just happens to be one of the most oil-rich nations on the planet.

The White House is worried that Netanyahu will interfere with current negotiations with Iran. Negotiations that never seem to achieve anything except a new postponed deadline. Netanyahu is worried that the U.S. will cave in to Iran's demands that will eventually lead to a hostile country with nukes. Just to make the entire story more scandalous Mr. Netanyahu is up for re-election on March 17th. The Israeli leader speaks in Washington on Tuesday, March 3rd.

The situation in Ukraine seemed quiet this past week at least on the number of headlines it received. There have been stories that the situation in Western Ukraine is deteriorating. At the same time there was a shocking story from Moscow on Friday. Boris Nemtsov, a high-profile Russian politician and outspoken critic of Russian President Putin was shot dead in the street. The event sounds like an assassination since it occurred just hours after Nemtsov had tweeted "Putin annexed Crimea and is now handing over Siberia to the Chinese."

The U.S. market's main focus remains on the Federal Reserve and when they will raise rates. The Fed wants to raise rates but they are afraid of killing the current economic growth. It has taken years for the U.S. to reach a relatively stable +2%-+2.5% annual growth. Unfortunately, there seems to be a parade of data showing that growth has slowed down in the first quarter of 2015. This weakness should delay any interest rate hikes. Plus, after Yellen's testimony last week, it sounds like she will give us plenty of warning by changing the language of the statements before actually raising rates.

The market's focus on rates is not without reason. Every single time the Fed has started an interest rate hiking cycle (since it's never just one rate hike) the U.S. stock market has declined. Three-months after the Fed starts raising rates the stock market is down an average of -3.8%. Long-term investors shouldn't panic. If the Fed raises rates for the right reason, normally an improving economy, then stocks should recover. Looking at the last three rate hike cycles shows that stocks were up an average of +6% twelve months later.

What worries me more than the Fed raising rates is the pace of earnings growth. I mentioned this last week. Analysts estimates for corporate earnings growth in 2015 have plunged and they're threatening to turn negative for the year. Earnings are the fuel for market rallies (normally). If earnings growth declines then market valuations could contract.

Technically the big picture for stocks continues to look bullish. However, after big gains in February, the market could be due for another pullback. Pick your entry points wisely.

~ James


"Change is the essential process of all existence." ~ Spock, Star Trek: The Original Series