Stocks continue to climb with the major U.S. indices up four weeks in a row. It's a pretty good start for 2012. Last week the market digested a massive number of earnings announcements. Apple Inc. (AAPL) was probably the highlight. The company blew away estimates and the stock gapped higher to new all-time highs near $450 a share, making it the most valuable company with a market cap of $417 billion. Exxon Mobil (XOM), with a market cap of $411 billion, had held that title for ages. Also making headlines was the FOMC meeting, a handful of economic reports, and more downgrades for Europe. One issue that seemed to hold the market back was Greece's inability to make any progress on its debt haircut with private sector investors.

Fed chairman Ben Bernanke and the U.S. Federal Reserve held a two-day meeting last week. Bernanke said that the FOMC would leave rates unchanged in the 0.00% to 0.25% zone. Furthermore they will likely leave rates at these levels well into 2014. Why? Because economic conditions are unlikely to improve. The Fed lowered their 2012 GDP forecast to 2.2%-to-2.7%, down from 2.5%-to-2.9%. The Fed is also worried that falling inflation could turn into deflation. It is the fear of deflation that could force the Fed to move again. Bernanke hinted at another round of easing in the future. The next FOMC meeting is in March.

Economic data last week was mostly disappointing. The big report was the Q4 GDP estimate. Economists had been expecting Q4 GDP growth at +3.0%. The data came in at +2.75%, which is improvement from Q3's +1.8%. Unfortunately if you dig underneath the headline number a large chunk of the Q4's growth was due to expanding inventories. Durable goods orders for December rose +3.0%, which was better than expected. Last week's initial jobless claims were in-line with estimates with a jump of +21,000 to 377,000. The latest housing data was disappointing. Pending home sales in December fell -3.5% when analysts were only expecting a drop of -3.0%. December is not a very hot month for home sales anyway. New home sales fell -2.2% to a seasonally adjusted annual pace of 307,000 homes. What's really frustrating for home owners was news that median home prices in the U.S. fell -12.8% to $210,300.

Major Indices:

The flood of earnings last week created a lot of individual stock volatility yet the volatility index (VIX), based on options for the S&P 500, is still drifting lower and hit new six-month lows last week. That could change soon. Some of the momentum indicators are suggesting the rally in stocks is running out of steam. The S&P 500 index only gained a single point last week. If I were a short-term trader I would be tempted to look at calls on the VIX soon.

Technically the S&P 500 continues to climb in a narrow channel with short-term support at its rising 10-dma. If stocks did pull back there could be some support at 1300 but I would focus on the 1280 level for any real dip. It looks like the next level of significant resistance is still the 1350 area.

Daily chart of the S&P 500 index:

Intraday chart of the S&P 500 index:

The NASDAQ composite continues to climb as well. It's up four weeks in a row and up five out of the last six weeks. The 2830-2880 zone is layered with multiple levels of potential resistance. Further gains could be a lot tougher here. Now that most of the major tech companies have reported, what catalyst is left to drive it higher?

You can see from the intraday chart that the NASDAQ is trading in a narrow channel. A dip to 2775 would still keep it in the bullish trend. On a breakdown I would look for potential support near 2750 and then the 2715-2700 zone.

Intraday chart of the NASDAQ Composite index:

The trend in the small cap Russell 2000 index looks similar. This index is also up five out of the last six weeks and closed near six-month highs. The 800 level could be round-number, psychological resistance. If the market does see a correction I would look for the $RUT to dip toward 775 or possibly the 760 level.

Daily chart of the Russell 2000 index

I am still watching the $SOX semiconductor index too. Right now it's consolidating along support near 410. A breakdown here could see the SOX plunge back toward the 390 area.

Looking ahead we have a very busy week for economic data. The reports to watch are the Chicago PMI, the national ISM and ISM services data, the ADP employment number, and of course the big one is the jobs report on Friday. Last month the jobs report showed +200,000 jobs. This month economists are only expecting +125,000. We need about +150K just to keep pace with population growth in the U.S.

- Monday, January 30 -
PCE prices
personal income and spending

- Tuesday, January 31 -
Case-Shiller 20-city home price index
Consumer Confidence for January
Chicago PMI

- Wednesday, February 01 -
ADP Employment report
construction spending
ISM (manufacturing) index for January
vehicle sales

- Thursday, January 02 -
Weekly Initial Jobless Claims

- Friday, January 03 -
Non-farm payrolls (jobs) report for January
unemployment rate
ISM services index for January

The Week Ahead:

As we look ahead what do we need to watch out for? We are still in the midst of Q4 earnings season but this is the back half of the season. Earnings announcements will continue to move individual stocks but they are unlikely to have a market-moving impact. Aside from the economic reports outlined above I am sorry to tell you that headlines out of Europe will likely be the market drivers.

Last week there was an underlying current of frustration with Greece's lack of progress in negotiations with private sector investors. At this point people are starting to come to grips with the idea that Greece may not last in the EU for much longer. I've been telling readers for a long time that Greece will eventually default. There were rumors out on Friday that Germany's leader Angela Merkel had confessed that Greece will default. You will probably hear a lot about Greece and Germany on Monday. There were headlines out late Friday that Germany wanted Greece to hand over its national budgetary controls to a third party appointed by the EU. You know that's not going to go over very well in Greece.

If Greece throws in the towel and says, "We give up. We can't pay our debts!" and essentially declares bankruptcy it would set a dangerous precedent. The markets can probably survive Greece leaving the Eurozone. It's been speculated and discussed for two years. What happens if Spain or Portugal decide to surrender as well? Bond yields on Portugal have been soaring lately. Portugal has already received one bailout. Now with yields on their 10-year bond near 15% they cannot afford to pay the interest on their debt. Spanish yields are not that high but growth is falling. There was data out last week showing unemployment in Spain was rising toward 23%. It's hard to grow your way out of debt if almost one in four citizens are not working. We've said it before. Parts of Europe and the EU will likely be mired in deep recessions for a long time to come as they deal with impact of their austerity measures. A recessionary Europe does not help the global economy since they're the largest trading partner with China.

I am also concerned about a potential disconnect between investors and stock prices. The latest investor sentiment data is showing bullish sentiment continues to grow while bearish sentiment has fallen toward multi-year lows. When everyone is standing on the same side of the boat there is a risk it will capsize. From a contrarian standpoint this is indicating a potential market top soon.

Here's an interesting thought: why are stock prices climbing while U.S. equity funds continue to see outflows. Investors are taking money out of equities and pumping it into bonds even though the yield on the 10-year bond is less than 1.9%. If everyone is so bullish on stocks why are they not putting more money toward stocks?

There is no denying the market's trend is still up but there are a lot of dark clouds on the horizon. It will be interesting to see what the market moving headlines will be this week. Some of the internals are not suggesting further gains. Of course we already know that the market can stay illogical for much longer than we think it can.

I am suggesting caution and would not be in a rush to open bullish positions.

- James