Last Monday was the first trading day of March and the NASDAQ made headlines with its first close above the 5,000 mark in 15 years. The S&P 500, the small cap Russell 2000 index, and the Dow Industrials all closed at record highs. Unfortunately that proved to be a short-term top. I cautioned readers last weekend that after big gains in February the market was due for a pullback.

Stocks endured a lot of headlines last week. There was a ton of economic data released. There were numerous central bank decisions. The financial sector digested the Fed's annual stress tests. In the end worries over the Federal Reserve raising rates send stocks lower on Friday after the February jobs number came in hotter than expected.

Investors were in a sell-everything mood on Friday as stocks, bonds, and commodities declined. The U.S. dollar surged to new 12-year highs. That put pressure on commodities. Silver prices ended the week with a -4.5% loss. Gold lost -3.9% to close at $1,164 an ounce. Crude oil was down on Friday but managed a +1.0% gain on the week yet WTI oil remains under $50.00 a barrel.

All of the Industrials, the S&P 500, and the $RUT all posted declines for the week. The Dow Jones transportation average lost -1.3%. The SOX semiconductor index only fell -0.3% for the week and is still up +3.7% year to date. Meanwhile biotech stocks continued to show relative strength thanks to new merger and acquisition headlines. Elsewhere the U.S. bond market retreated and the sell-off accelerated on Friday. The yield on the 10-year note ended at two-month highs near 2.24%.

Financial stocks failed to see any relief after the Federal Reserve announced the results of its annual stress test. This year the Fed's stress test wanted to see how the biggest 31 banks would hold up if the U.S. economy saw unemployment rise to 10%, if housing prices dropped -25%, and if the stock market plunged -60%. Believe it or not, it was the first time since these stress tests started in 2009 that all the banks tested received a passing grade.

Meanwhile crude oil's direction remained in focus. The number of active rigs inside the U.S. fell for the 13th week in a row. The Baker Hughes rig count dropped another 75 rigs to 1,192 - that's a new 18-year low. At the same time U.S. production rose another +39,000 barrels per day to 9.324 mbpd, which is a 43-year high. The EIA said oil inventories rose +10.3 million barrels from the prior week to 444.4 million barrels, which is a new 80-year record.

There is a growing concern that the U.S. will actually run out of storage before demand is expected to rise this summer. Estimates suggest we could run out of storage by the end of March or early April. If that occurs, Charles Perry, the CEO of energy-consulting firm Perry Management, speculates that crude oil could drop into the $30-40 a barrel range.

Economic Data

We had a ton of economic data released last week. Personal income rose +0.3% in January but personal spending slipped -0.2%. The lack of spending does not bode well for Q1 GDP growth but optimists argue the drop was due to lower gasoline prices.

The February ISM index fell to a 13-month low at 52.9 from January's 53.5. The ISM non-manufacturing (services) index inched higher from 56.7 to 56.9 in February. Numbers above 50.0 suggest growth. The latest Factory Orders in the U.S. fell for the sixth month in a row with a -0.2% drop in January following December's -3.5% plunge. Most of the weakness was due to falling petroleum refinery orders.

Focusing on the labor market the weekly initial jobless claims spiked to nine-month highs at 320,000. Yet this was overshadowed by a healthy ADP National Employment Report. ADP revised their January private job growth estimate from +213,000 to +250K. Their February number showed +212K new jobs.

Nonfarm Payroll Report

The big economic report for the week was the U.S. nonfarm payroll number. Economists were expecting +240,000 new jobs in February. The BLS announced that February saw +295,000 jobs. This sparked a widespread sell-off across the market. There are plenty of opinions on when the Federal Reserve is going to raise rates. For a while there it seemed that consensus was starting to settle on June 2015 for the Fed's first rate hike. However, after the last few weeks of disappointing economic data most had written off June and were looking further out to September or even later. Suddenly this hotter than expected jobs number made a June rate hike a strong possibility again.

The U.S. government said that in spite of the cold winter weather it did not have much impact on the normally weather-sensitive jobs. Construction jobs and hospitability-related jobs both saw gains last month. That surprised a lot of people. The colder than normal winter and the piles of snow blanketing much of the East Coast had soured many expectations. Many analysts were forecasting job growth below 200K.

January's job number of +257K was revised down to +239K. February's jobs report marks the twelfth month in a row of more than +200K jobs. We haven't see a stretch of job growth this good since the 19-month streak that ended in March 1995.

The U.S. unemployment rate dipped from 5.7% to 5.5%. That's the lowest reading since May 2008. Unfortunately this decline was due to another drop in the labor participation rate, which fell from 62.9% to 62.8%, near multi-decade lows. The U-6 measure of unemployment, which includes those working part-time but are seeking full-time work dipped from 11.3% to 11.0%.

Central Banks

Last week there were a number of central bank moves or in some cases lack of movement. The Bank of England left rates unchanged at 0.5%. The Bank of Australia left their rates unchanged at 2.25%. India's central bank reduced its repurchase rate by 25 basis points to 7.5%, which marks the second cut this year. The central bank of China cut its loan and deposit rates by 25 basis points each to 5.35% and 2.5%, respectively.

The one central bank that really made headlines was the European Central Bank (ECB), which met on Thursday. They left rates unchanged at just above zero. The focus was on the ECB's new QE program, which will launch on Monday, March 9th. The ECB will start buying 60 billion euros a month up to September 2016 or until inflation in the Eurozone nears 2%.

Many found it interesting that ECB President Mario Draghi raised their Eurozone GDP growth forecast from +1.0% to +1.5% in 2015. They also projected inflation to rise from zero percent today to 1.8% in 2017. A few market pundits speculated that the ECB was already gaming the system. If the ECB raises their economic and inflation targets above expectations then they can extend their QE program when they miss their targets.

Overseas Economic Data

The latest estimate on Eurozone Q4 GDP was unchanged at +0.3% quarter over quarter. Eurozone Retail Sales came in better than expected at +1.1% for the month. That's probably thanks to Germany's retail sales rising +2.9% for the month, significantly above estimates. There was some interesting news out of Spain. The country's economy minister, Luis de Guindos, said that the Troika was negotiating with Greece over a third bailout. This is a move the European Commission denies.

Japan reported its manufacturing PMI inched higher from 51.5 to 51.6 in February. Meanwhile China's official PMI ticked higher from 49.8 to 49.9. The HSBC Chinese manufacturing PMI improved from 50.1 to 50.7. Numbers above 50.0 suggest growth, below 50 contraction.

The big news out of China last week was their new forecast. Chinese Premier Li Keqiang, in his opening remarks to the National People's Congress, lowered the country's GDP target from 2014's +7.5% down to +7.0%. Keqiang said, "With downward pressure on China's economy building and deep-seated problems in development surfacing, the difficulties we are to encounter in the year ahead may be even more formidable than those of last year."

Depending on which metric you choose to use China is either the first or second largest economy on the planet (in a contest with the U.S.). If China continues to slowdown that's not good news for the global economy. Some analysts believe that China's new target of +7% growth is still too optimistic.




Major Indices:

The big cap S&P 500 index lost -1.5% for the week. It was the second weekly loss in a row and its 2015 gain is down to +0.6%. Kind of an ugly week after closing at a record high on Monday. Monday, March 9th, is the six-year anniversary of the bear-market low back in 2009 where the S&P 500 dipped to 666. More on that in a bit.

I cautioned readers last week that if the 2,100 level did not hold as support then look for a dip to 2,085. The S&P 500 dipped to 2,087 on Wednesday before bouncing. Unfortunately the market-wide sell-off on Friday sent it to new three-week lows. The 2,065 area looks like it could offer some support. Below that we're probably looking at the 2,000 area as potential round-number support.

chart of the S&P 500 index:

The NASDAQ composite finally hit the 5,000 mark again. We actually saw it close above this significant psychological level on March 2nd. It looks like traders decided that was their signal to take profits. The NASDAQ retreated with a -0.7% decline for the week. It's still up +4.0% in 2015.

If the 4,900 level does not hold as support I would watch the 4,800 region as the level to watch. The 4,800 level is both prior resistance and lines up with a 50% retracement of the February rally.

chart of the NASDAQ Composite index:

Small caps followed the big caps lower. The Russell 2000 ($RUT) fell -1.29% versus the S&P 500's -1.5%. It closed just below potential support at the December highs. The next level of possible support is the 1,200 mark, which was resistance in January. If the 1,200 area breaks then we're probably headed for the 200-dma near 1,160.

chart of the Russell 2000 index



Economic Data & Event Calendar

It's a very quiet week for economic data. The only thing worth mentioning is probably monthly retail sales and the PPI.

Economic and Event Calendar

- Monday, March 09 -
(nothing significant)

- Tuesday, March 10 -
Wholesale inventory data

- Wednesday, March 11 -
(nothing significant)

- Thursday, March 12 -
U.S. Retail Sales data from February
Business inventory data

- Friday, March 13 -
Producer Price Index (PPI)
University of Michigan Consumer Sentiment survey

Additional Events to be aware of:

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

Looking Ahead:

Investor sentiment took a beating on Friday with the good news is bad news reaction to the jobs data. Another issue could be growth estimates. A couple of weeks ago Goldman Sachs reduced their Q1 GDP forecast due to the harsh winter weather. This past week JP Morgan cut their Q1 GDP forecast from +2.5% down to +2.0% due to the weather. The Atlanta Fed has also recently reduced their Q1 forecast and they're only expecting +1.2% growth.

Another issue to watch is the U.S. dollar. The biggest corporate excuse for missing earnings in the fourth quarter was the rise of the U.S. dollar. A strong dollar makes U.S. products and services more expensive. Today the dollar index is at 12-year highs and sprinting higher. When the Fed does raise rates it should boost the dollar even further. At the same time the ECB's new QE program, which starts tomorrow, will make the euro weaker and thus add even more upward pressure on the dollar.

Chart of the U.S. dollar ETF

We are two weeks away from the next FOMC meeting and speculation about this meeting's statement will probably dominate the financial media between now and then. Everyone will wonder if the Fed's statement will change following February's hotter than expected jobs number. As long as the Fed keeps the word "patient" in their statement then most believe that any rate hike is still at least two meetings away. Goldman Sachs believes that after Friday's jobs report we will see the Fed modify their statement. However, they do not expect a rate hike until September.

It's certainly possible that the market's knee-jerk reaction (lower) on Friday is just a one-day event. The Federal Reserve has told us time and again that its policy is "data dependent". Rising job growth is just one factor in the manifold of components they will base their decision on. Sure, job growth seems pretty steady. Yet wage growth is not getting out of hand. Friday's nonfarm payroll report said hourly earnings only rose +0.1% in February. That's down from January's +0.5%. The Fed will also consider falling Q1 GDP estimates, falling corporate earnings, and the lack of inflation in the U.S. Europe is still hovering at 0% growth and China just reduced their 2015 growth estimate.

Bull Market Anniversary

Tomorrow you might hear people talking about the sixth anniversary of the current bull market. March 9, 2009 was the bear market low. Looking at S&P 500 data, the current bull market is the fourth longest market in the last 85 years. The research team at Stock Trader's Almanac dug into the numbers. They said that since 1930 the average bull market lasts 1,185 days with an average gain of +127%. As of the March 2nd, 2015 closing high the S&P 500's bull market is 2,184 days old with a gain of +213%. The Dow Industrial Average is up +179% and the NASDAQ composite is up +294%. A normal market sees a pullback of -10% or more about twice a year. We haven't seen one in almost 1,260 days. We got close with a -9.8% decline last October.

I am suggesting patience. We can use this market pullback to our advantage. Now is the time to find strong stocks that we want to buy on a correction near support.

~ James