The U.S. markets are off to a good start with the S&P 500 index up +1.6% this year. Unfortunately most of those gains came from Tuesday's rally. Stocks were unable to build on gains and spent the rest of the week churning sideways. What worries me is that most of the economic data this past week was positive but stocks lost momentum. Investors seem to be waiting for something and that something could be the next debt auction in Europe or the onset of Q4 earnings season here in the U.S.

We knew that China would help set the tone with their GDP estimate last Monday. Economists were expecting +8.5% Q4 growth and the country's state-run newspaper said China saw +8.8% growth. What was surprising is that China said 2012 could see growth fall under the 8% level. Many feel this is a significant threshold for China. Growth less than 8% would see rising unemployment as millions of Chinese move from rural communities toward the cities looking for jobs. Helping offset this news was generally positive manufacturing data out of India and Europe.

There was a fly in the ointment on Europe's economic data. While the region saw an improvement in manufacturing activity the EU's strongest member, Germany, said manufacturing actually fell for the third month in a row in December. German PMI data came in at 48.1. Numbers under 50.0 indicate contraction and potential recession. Germany is a major exporter and their exports saw their biggest drop in six months.

If Germany is struggling the rest of the EU region can't be doing that well. This was evident in new worries over Spain last week. Even Hungary, which is not a member of the Eurozone, made headlines with a recent debt auction. Hungary held an auction of one-year notes but they were only able to sell 75% of the available debt and yields on the debt that was sold rose to 9.9%. This obviously doesn't bode well for Hungary's financial stability if investors are demanding almost 10% returns on one-year notes. Speaking of bond yields, Italy continues to be front and center for investors with Italian 10-year bond yields still hovering at 7%. The 7% level has traditionally been considered the threshold on whether or not a country needs to seek an IMF bailout or not and Italy is considered too big to be bailed out.

Looking back home in the U.S. it was a busy week for economic data. The big reports were in the job market. The ADP employment report helped set a positive tone with +325,000 new jobs in December. Unfortunately stocks failed to react to the news. The Labor Department's nonfarm payrolls (jobs) report came out on Friday with +200,000 new jobs in December. This was up from November's +100K and better than the 150K estimate. Yet stocks again ignored this positive data. The unemployment rate fell from 8.7% to 8.5% but this was due to another drop in the size of our work force again.

In other economic news the December ISM manufacturing data came in at 53.9, which is up from 52.7 in November and better than expected. The ISM services index rose from 52.0 to 52.5 but this was under the 53.0 estimate. Construction spending from November rose +1.2%, which was better than the +0.5% expected. The weekly initial jobless claims dropped 15,000 to 372,000, which was in-line with estimates. Another event that failed to move the markets was the FOMC minutes, which was released last week. The next FOMC meeting is still a couple of weeks away.

Major Indices:

Looking at the S&P 500 index the good news is that we see a bullish breakout past resistance in the 1265-1270 zone. Now the S&P 500 is poised to breakout past resistance at 1285. That sets up for a run toward round-number resistance at 1300. Another positive is that last week's advance is a bullish breakout past technical resistance at the simple 200-dma and what appears to be the neckline to an inverse head-and-shoulders pattern, which is forecasting a rally toward 1,362. Yet another positive is the move past 1,270, which has created a brand new triple-top breakout buy signal on the S&P 500's Point & Figure chart, which is now forecasting a long-term target of 1,430. That's a lot of positives for the index but I would stay cautious. January tends to see a correction in the second half of the month.

Short-term the S&P 500 is looking at resistance at 1285 and support near 1260.

Daily chart of the S&P 500 index:

The NASDAQ composite turned in a strong week with a +2.6% gain. The index has also broken through several layers of resistance (see chart) including its simple 200-dma. The next hurdle for the bulls is probably round-number resistance at 2700. The 50-dma and the 2600 level are probably short-term support. Last week I cautioned readers that the NASDAQ was on the verge of a breakout from its neutral pattern of lower highs and higher lows. Let's hope this tech-heavy index can build on last week's gains.

Daily chart of the NASDAQ Composite index:

The small cap Russell 2000 index managed a +1.1% gain but the index remains under resistance near 760 and its simple 200-dma. The good news is that if the $RUT can breakout past 760 it could signal a new leg higher with a target in the 840 area. On a short-term basis I would look for support near 730-725.

Daily chart of the Russell 2000 index

The economic calendar this week is a little light. The major events are probably the Federal Reserve's Beige Book report on Wednesday and the ECB interest rate decision on Thursday.

- Tuesday, January 10 -
whole sale inventory data

- Wednesday, January 11 -
Fed's Beige Book report

- Thursday, January 12 -
Weekly Initial Jobless Claims
European Central Bank (ECB) decision on interest rates
(U.S.) Retail Sales for December

- Friday, January 13 -
Import/export data
Michigan Consumer Sentiment for January

The Week Ahead:

Looking ahead this week will begin the Q4 earnings season with Dow-component Alcoa (AA) reporting on Monday (Jan. 9th). Wall Street is expecting AA to deliver a loss of 1-cent a share. Earnings season doesn't really kick into high gear until the following week. There is still a chance we could see some earnings warnings for companies announcing later in the season. The week ahead of us will be filled with speculation about corporate earnings and guidance. The real key for stocks will be guidance. Investors want to know what management sees as they look ahead into the first and second quarter of 2012. If corporate leaders are too cautious it could spark a correction in stocks. Of course there is always the risk that investors choose to sell the earnings news no matter what the results are and the market sees a correction anyway.

What is troubling for longer-term traders is that retail investors continue to pull money out of equity markets. U.S. equity funds saw outflows for the ninth week in a row. Since 2007 the retail investor crowd has pulled out $450 billion from equity funds.

One positive I see this past week is that investors might be growing numb to the problems in Europe and the EU. The last few months the euro currency was seen as a barometer of investor sentiment on Europe and hopes that the EU will find a solution for their problems. If the euro was up then stocks were up and if the euro declined then stocks declined. That relationship seemed to break down last week with the euro currency hitting new relative lows. The euro is still a decent barometer for investor sentiment toward Europe but now we might be seeing signs of a decoupling from the U.S. equity markets.

A week ago I warned readers that U.S. stocks could see a pop higher and then stall. That's exactly what happened although to be honest I thought the pop might last two or three days. Now we are facing a questionable Q4 earnings season. The temptation for investors to sell the (earnings) news could be tough to resist.

Overall my comments from last week remain true today. Here's a repost:

I suspect the trend of very slow but improving economic data in the U.S. will continue. However, we will remain very susceptible to negative headlines out of Europe. There are significant chunks of Europe that are facing severe recessions as governments follow through on their austerity measures. The EU leaders still don't have a concrete plan to solve their toxic debt problem. Italy is in hot water with its long-term bond yields hovering near 7%. The EU has huge amounts of debt it needs to roll over in the first quarter of 2012 and that's not going to be an easy task if they can't bring bond yields down. Meanwhile there seems to be growing concern over China's economy.

One of the biggest landmines for the first quarter of 2012 will be credit downgrades. The major ratings agencies have already warned us by putting several countries on creditwatch negative. Here in the U.S. the 2012 Presidential race is heating up. All the attack ads on TV could be a bearish factor on investor and consumer sentiment.

My market bias this week is neutral but I'm expecting a pull back in stocks the last two weeks of January.

- James