The stock market has been very mercurial the last few weeks. The S&P 500 has gone a 28 trading days in a row without back to back gains. That's how indecisive and erratic trading has been. Stocks gave back most of their gains from two weeks ago. All of the major U.S. indices posted losses for the week. The worst performing industries included transportations stocks (-4.89%), semiconductors (-5.0%), banking stocks (-3.4%), and biotechs (-4.89%). Meanwhile commodities bounce. Gold and silver both rose +1.3%. Crude oil managed a +4.29% rally for the week and that's after factoring in Friday's -5.8% plunge.

The number of active oil rigs in the U.S. declined for the 15th week in a row. Last week the number of active rigs dropped -21, which is the slowest decline in the last 16 weeks. It's possible we are nearing a bottom in the number of active rigs. The last time this happened, back in 2008-2009, the number of active rigs dropped for 18 weeks in a row with a -57% correction over a 41-week time frame. Currently the number of active rigs is down -45.7% from the September high and sits at 1,048 (includes both oil and natural gas rigs).

The rally in oil was all about geopolitical risk since U.S. production remains super strong and inventories continue to build. The main story was violence in the country of Yemen. Saudi Arabia led a coalition of ten Sunni Muslim nations in a military offensive to bomb Shiite rebels in the neighboring country of Yemen. There was speculation that these rebels could try and attack major oil production and processing facilities in Saudi. There was also a concern that the rebels might try and close the 20-mile strait of Bab-el-Mandeb, which is at the southern entrance to the Red Sea. More than 3.8 million barrels of oil per day flows through this strait on oil tankers headed for the Suez Canal to the north. It appears that Saudi has military equipment and men massing on the border of Yemen so this story isn't over yet. Many are calling this conflict a proxy war between Saudi and its archrival Iran.

Economic Data

It was a quiet week for economic data in the United States. The Consumer Price Index (CPI) showed its first increase since October with a +0.2% rise in February. This followed a -0.7% decline in January. A bounce in energy prices are behind the increase. If you're worried about deflation, then this report is a step in the right direction.

Overall U.S. economic data continues to disappoint. The regional Richmond Fed survey dropped to -8 when analysts were expecting +3. The durable goods orders, which tracks products that are expected to last at least three years, fell -1.4% in February. Economists were expecting a +0.2% improvement. Meanwhile the final estimate on 2014 Q4 GDP growth was revised from +2.19% to +2.22% but that's still below expectations for +2.4% growth. It's also less than half the +4.97% pace we saw in Q3.

On the plus side the latest revision on the University of Michigan Consumer Sentiment survey was revised higher from 91.2 to 93.0 for March but that's down from February's 95.4 and the recent high of 98.1 in January. One bright spot in the flow of economic data was new home sales, which surged +7.8% to an annual rate of 539,000. That's the hottest pace since March 2008.

Federal Reserve Chairman Janet Yellen was making news again when she spoke on Friday morning. She reiterated that the Fed could raise interest rates at any time. However, she believes the U.S. economy is still weak. Considering the fed's "level of accommodation the economy should be booming." Yellen noted that the Fed is still struggling to get the inflation level back toward 2%. She very much wants to avoid the fate of Japan and Sweden. The central banks of these two countries tightened monetary policy too soon and crushed their recoveries.

Overseas Economic Data

Japan reported their manufacturing PMI data for March declined from 51.6 to 50.4. Economists were expecting a rise above 52. The HSBC China Flash Manufacturing PMI dropped from 50.7 to 49.2. Numbers above 50.0 suggest growth and below 50.0 indicate economic contraction.

The Eurozone manufacturing PMI improved from 51.0 to 51.9, which was better than expected. Their services PMI rose from 53.7 to 54.3. The Markit Eurozone PMI hit 54.1, the highest reading since May 2011.

According to a recent article in Bloomberg ECB President Mario Draghi's QE in Europe has already seen success. The program started three weeks ago. The reaction has been steep. Bond yields in Europe have dropped. The euro currency has continued to slide, making exports more competitive. Stock markets in Europe have soared. Economists at Deutsche Bank believe that the ECB's QE has already helped reduce the risk of a deflationary spiral in Europe.

Unfortunately for Europe the situation with Greece remains a nightmare that they can't wake up from. Greece is desperate for cash. The Financial Times noted that Greek citizens and companies pulled €7.6 billion out of Greek banks in February. The pace of withdrawals has slowed from January's €20.4 billion but the amount of cash inside Greek banks has plunged to €140.5 billion. That's the lowest level in ten years. Now the Greek government has started stealing money, excuse me, borrowing money from its public health service funds. The country is quickly running out of money while they negotiate with the troika for additional bailout funds.

It was recently estimated that Greece could run out of money by April 9th but the current estimate is April 20th. Part of the challenge is coming up with money to pay some debt payments on April 14th and 17th. Europe knows this and they're still playing hardball. After loaning Greece hundreds of billions of euros they want proof that the country is going to follow through on new reforms before lending Greece any more cash. Right now Greece has a new deadline. On Wednesday, March 25th, the 18 members of the Eurozone told the Greek government that they had five days to show them exactly how they would follow through on the required reforms. Otherwise, no more bailout cash. The five days is up this Monday (March 30th).




Major Indices:

Friday's bounce snapped a four-day losing streak for the S&P 500 index. If it can bounce on Monday it would be the first back-to-back gain since February 17th. On a short-term basis the 2,040 level is support. The 2,080, 2,100, and the 2,120 levels are all potential overhead resistance. Should the S&P 500 continue to fall then its 200-dma near 2,010 or the December and February lows is the next area of potential support. Year to date the S&P 500 is essentially unchanged.

chart of the S&P 500 index:

The rally in the NASDAQ composite failed at its multi-month trend line of higher highs (see daily chart below). The reversal lower was pretty dramatic with Wednesday's plunge. Thursday morning saw a break below short-term support near 4,850 but it recovered. At the moment it's down -2.6% from its March closing high (which was 15-year highs). I would keep an eye on the 4,800-4,850 zone. This area should be support. A breakdown under 4,800 might signal a drop toward 4,600 and its simple 200-dma.

8-month chart of the NASDAQ Composite index:

chart of the NASDAQ Composite index:

Believe it or not but the small cap Russell 2000 index probably looks the best. It found support at its trend line of higher lows and looks ready to rebound. The 1,220 area is additional support. Should that level break the $RUT could find support at 1,200. Overhead resistance is way up near 1,270. Year to date the $RUT is still up +2.9%.

chart of the Russell 2000 index



Economic Data & Event Calendar

It's a busy week for economic data. The first week of the month always brings a rush of new data. The national ISM index will give us another look at the U.S. economy. The car sales numbers are expected to show improvement and indicate a healthy consumer. Of course the real focus will be on jobs. The nonfarm payroll report for March will come out on Friday but the U.S. stock market is closed for Good Friday (Easter is Sunday). That means the stock market will not be able to react to the jobs data until Monday morning.

It's also worth noting that several Federal Reserve members will be speaking this week. No one is expecting any fireworks from their talks but you never know when someone could say something market-moving.

Economic and Event Calendar

- Monday, March 30 -
Personal Income & Spending
Pending Home Sales

- Tuesday, March 31 -
Case-Shiller 20-city Home Price index
Chicago PMI

- Wednesday, April 01 -
ADP Employment Report
ISM Index
Auto & Truck sales

- Thursday, April 02 -
Factory Orders

- Friday, April 03 -
Non-farm payrolls (jobs) report
Unemployment Rate
Good Friday - U.S. stock market is closed

Additional Events to be aware of:

April 29th - FOMC policy update
May 7th - Election in the United Kingdom

Looking Ahead:

The relative weakness in the Dow Jones Transportation Average ($TRAN) is a worry signal for investors. The big transportation companies that make up this index are considered a good barometer of the U.S. economic health. Unfortunately United Parcel Services (UPS), the nation's largest package delivery company, has already guided lower for the current quarter. Another challenge is the railroad companies. The plunge in oil and gas drilling activity is hurting railroad traffic. The number of active rigs has been cut in half and that reduces demand for railcars to move drilling pipe and fracking sand. The Bureau of Transportation Statistics believes that a downturn in the transports leads a decline in economic activity. "According to BTS research, over the past three decades the freight TSI [index] led slowdowns in the economy by an average of 4-5 months." You can read their note on their website.

chart of the Dow Jones Transportation Average

Q1 GDP Estimates Falling

The last few weeks we have noted how the Atlanta Federal Reserve has a very dismal outlook for Q1 GDP growth. They have downgraded their outlook several times. Last week they did it again. Three weeks ago their Q1 estimate was +1.2%. Then they dropped it to +0.6% and again to +0.3%. This past week they reduced their Q1 estimate to +0.2% growth.

Most of Wall Street is still expecting Q1 GDP growth above +2.0% but a few are starting to take notice of the Fed's outlook. Now we are seeing some adjustments lower. Morgan Stanley just reduced their Q1 estimate from +1.2% to +0.9%. They're worried that low business inventories, the harsh winter weather on the East Coast and the port slowdown on the West Coast has hampered GDP growth. Barclays just lowered their estimate to +1.2%. J.P.Morgan Chase has downgraded their Q1 estimate from +2.0% to +1.5%.

An Earnings Recession

Another challenge facing the stock market is what some are calling an earnings recession. Expectations are growing for earnings to fall for two or more quarters this year. Standard & Poor's is forecasting Q1 earnings growth to decline -5.6%. If we do see earnings growth turn negative it will be the first decline since 2012's Q3. Estimates also suggest -4.0% earnings growth in Q2 2015 and -0.8% in Q3.

The U.S. dollar has seen a pullback from 12-year highs but the long-term trend is higher. The ECB's QE in Europe will continue to pressure the euro lower. Japan's central bank is still working on a massive QE program that has kept the yen low. With these major central banks pushing their currency lower the dollar can't help but rise, especially since the Federal Reserve has ended its QE program and wants to raise rates. A rising dollar will continue to hurt profits for big multi-national companies. About 50% of revenues for the S&P 500 companies are outside the U.S. When earnings growth turns negative investors turn more cautious and we could see a correction in the stock market.

April

The Stock Trader's Almanac says that April is the best performing month for the Dow Jones Industrial Average since 1950. Looking at just the last 20 years the $INDU is up 80% of the time in April. However, the day after Easter is consistently the worst "post holiday" performance all year long. It's also worth noting that April is the last month in the best six months of the year pattern. Pretty soon we're going to hear people talking about "sell in May and go away".

The stock market has been indecisive lately but we shouldn't forget that the U.S. markets were hitting new highs less than two weeks ago. A pullback may not be out of the question here. It would not surprise me to see stocks churn sideways until Q1 earnings season starts. Corporate earnings results and guidance will have a major influence on market direction over the next few months. Earnings season starts on April 8th but doesn't really kick into full swing until the following week. My concern is that weeks and weeks of disappointing earnings reports could send the market lower.

~ James