U.S. stocks turned in some impressive gains for a holiday shortened week. Yet in spite of the gains volume was light. If there is no volume on the bounce then that could mean investors are nervous or they just don't believe the rally is for real. The rebound started to lose steam as stocks neared overhead resistance. Now depending on which index you look at we're either at resistance or possibly just above it but almost all of them look short-term overbought with the sharp two-week bounce.

This week trading could be dominated by foreign markets again. Many expect the Chinese Shanghai market to open lower after a weeklong holiday. You probably remember the big headlines on February 12th when government officials waited for the Chinese market to close before announcing they were raising bank reserve requirements for the second time this year. Monday will be the first time Chinese investors will get a chance to react to that news. Reuters said short-selling pressure in the Hong Kong markets surged on Friday in anticipation of a down move in the Shanghai market.

More importantly China's decision to raise bank reserve requirements is an effort to cool down their economy. In the past they usually issued a series of moves to change policy and slow down lending and growth. This could be the beginning of a multi-month move to slow down business before the economy overheats. Economists are left to question how China's new stance will affect the struggling global rebound.

It will be interesting to see how the Shanghai market reacts this week but the real focus might be on Europe. Another week has passed without any hard details on the EU's "aid" package for Greece. We knew the "special summit" recently held by EU leaders was just a diversion to buy some time. During this lull most of the European stock markets have produced a string of gains. Now it looks like time could be running out.

Greece has a lot of debt it needs to rollover. The country plans to auction off five billion euros worth of ten-year bonds in the next week or two. The success or failure of this auction could have massive repercussions. If Greece is successful with this auction then it would go a long way to defuse the situation. If Greece is not successful then it will re-ignite the EU-implosion fears and debt default worries for Portugal, Italy, Ireland, (Greece) and Spain - the PIIGS countries. Bigger picture it raises concerns about the future of the EU since so many members are in trouble.

Credit default swaps on Greece debt are already at historical, all-time highs, which suggests investors have no faith in Greece's ability to repay their debts. Yet given the stakes for this auction one has to wonder if all the EU countries will pull together and secretly buy these Greek bonds just to make sure demand is strong and it's seen as a success. Sadly we don't have a date yet for this event but it's supposed to be "soon".

One of the biggest stories last week was the Federal Reserve's decision to raise the interest at the discount window from 0.50% to 0.75%. This is the rate they charge banks for emergency loans so it has no real affect on you and me. Business at the discount window has shrunk significantly so most analysts felt this move was largely symbolic. It was heralded as a move to "normalization" of the system. Unfortunately the Fed made this interest rate change after hours and left the world wondering for several hours what does "normalization" mean and what was the next piece of monetary policy to get normalized? The biggest concern was whether or not the Fed was going to normalize interest rates, which are currently sitting at an all-time historical low of 0.0%-0.25%.

Fortunately the answer seems to be that the Fed will leave interest rates alone for now. The mean reason for the Fed to raise rates is to combat inflation and in the U.S. inflation is virtually nonexistent. The next day, Friday, the consumer price index (CPI) came out with a +0.2% gain, which was smaller than expected. The 12-month rate came in at +2.7%. The core rate of inflation, which excludes more volatile food and energy prices, actually fell 0.1% in January. That was the first monthly decline in the core rate since December 1982. More than one economists believes that the Fed will leave rates unchanged for the rest of 2010.

Overall most of the economic data last week was bullish except for the weekly initial jobless claims, which continue to disappoint. Of course we already knew that unemployment was going to be a consistently dark cloud over the economy for months to come so no surprise there. This week we'll get another wave of economic data with consumer confidence, home sales data, the Richmond Fed survey, the Kansas City fed survey, the ISM numbers, and the GDP revision. As long as we don't get any serious disappointments I'm expecting the data flow to remain positive for stocks.

To wrap things up we've got China trying to slow down its economy and its market poised to fall short-term. European stocks have been in rally mode but that could change if Greece creates a stink with a failed debt auction. That would send the euro plummeting even more and the dollar's strength would hammer commodities again. Most of the economic data in the U.S. has been healthy as long as we ignore the unemployment numbers and turn a blind eye to the rising amounts of debt and questionable bidders for our own debt auctions. The short-term trend in stocks is up but we're arguably short-term overbought now with stocks near resistance. I'll be honest. Part of me feels like stocks should roll over soon and we'll see a new lower low before March is over. However, bull markets tend to climb a "wall of worry" and I believe we plenty of things to worry about for now. This bounce may not be over yet.

Chart of the S&P 500 Index:

Weekly Chart of the S&P 500 Index:

Chart of the Russell 2000 Index:


Previous Comments on my Long-Term Outlook:

My long-term outlook has not changed. I still expect the economy to see a double-dip, "W"-shaped rebound with the second dip in 2010 (some analysts are predicting it will not show up until 2011). Lousy consumer spending, rising foreclosures, and lagging job growth will be the main culprits. Several weeks ago there were some comments out of the U.S. Treasury concerning foreclosures. The Obama administration's HAMP loan modification program can only help a certain number of homeowners and one official said that even if the HAMP program was a total success we should still expect millions of new foreclosures. This only reinforces my own belief that we will see another tidal wave of foreclosed homes in 2010 and 2011. Some analysts are forecasting upwards of six million foreclosures in the next three years. What is that going to do to consumer confidence and consumer spending? It's not going to help! You can review my long-term outlook here. It's the second half our my "Two Months Left" commentary.

~ James Brown