A parade of better than expected economic data in the U.S. overpowered any negative headlines about Europe. Stocks managed to rally past a week with bearish news from the Moody's credit rating agency, Q4 GDP declines in Europe, and a growing unease that Greek may not have the will power to follow through on its austerity measures. All the major U.S. indices rose over +1% and the S&P 500 index is up six out of the last seven weeks to close at eight-month highs.

The U.S. dollar managed a bounce but it's off its best levels of the week. Gold prices drifted lower for the third week in a row. Yields on the 10-year U.S. bond continue to drift sideways in the 1.8% to 2.1% range. Oil was a standout performer with a bullish breakout higher thanks in part to escalating tensions with Iran. Thus far the S&P 500 has produced its best year to date performance in twenty five years. The index is currently up +8.2% in 2012. It's up +12.2% from the December low and up +26.6% from the 2011 October lows. The NASDAQ composite index closed at levels not seen since late 2000. If there is one thing technicians could complain about is the low volume that continues to plague the market's advance.

The Moody's rating agency made headlines early last week when they downgraded the credit ratings on Italy, Portugal, Spain, Slovakia, Slovenia, and Malta. Moody's also changed their outlook from "stable" to "negative" on Austria, Britain, and France, which means there is a 40% chance that these countries could see their credit rating downgraded over the next 18 months. Later in the week Moody's announced they were reviewing the ratings on several major banks. Elsewhere the Q4 GDP data out of the Europe area was disappointing. The Eurozone's Q4 GDP fell -0.3%. The two largest countries in the Eurozone, Germany and France, reported -0.3% and -0.2% declines, respectively.

Overall economic data out of the U.S. was positive. The New York Empire State manufacturing survey rose from 13.5 to 19.5 when analysts were only expecting a rise to 14.0. The Philly Fed survey improved from 7.3 to 10.2, which was better than expected. Weekly initial jobless claims fell past expectations of 365,00 to 348,000. This is the lowest level since March 2008. Continuing jobless claims dropped 100K to 3.43 million.

Home builders seem to be growing more confident. The housing market index rose from 25 to 29 when analysts were only expecting this confidence number to rise to 26. The January housing starts number rose to an annual pace of 699,000, which is up from an upwardly revised rate of 689,000 the month before. Economists had been expecting a number closer to the 670,000 pace. The three-month average for housing starts, which helps smooth out the month to month volatility, set a three-year high at 697,000.

Inflation data last week was generally tame. The Producer Price Index (PPI), which looks at inflation on a wholesale level, saw January's number come in at 0.1% when economists were expecting 0.3%. The core PPI rose 0.4%, which was higher than the 0.2% expected. The Consumer Price Index (CPI) saw January rise 0.2%, which was better than the 0.3% expected. The core CPI also rose 0.2% versus estimates of 0.1%.

Meanwhile the monthly retail sales figures for January came in at +0.4%. Business inventory data from December rose 0.4%. Industrial production in January was unchanged. All of these came in less than expected. Speaking of expectations the FOMC minutes was a non-event last week.

Major Indices:

Traders remain in a "buy the dip" mentality. The S&P 500 index found short-term support near the 1340 level twice last week. The Thursday-Friday bounce lifted the S&P 500 to new eight-month highs. The 1350 area was expected to be major resistance. Now that we're above it the next level of overhead resistance is the 2011 closing high at 1,363.61 and the intraday high at 1,370.58 set near the beginning of May. Once past this area the next likely resistance level is the 1,400 area.

Stocks are way overdue for a correction. I mentioned last week that corrections in a bull market tend to fall in the -3% to -5% range. A -3% pull back from current levels would be 1,320. A -5% drop would be 1,292 although I'd probably look for support at 1,300 instead.

A few weeks ago I mentioned the S&P 500's point & figure chart and how it set a new triple-top breakout buy signal. Well the P&F chart's long-term bullish target created with this new buy signal has risen from 1,430 to 1,670. I wouldn't get too excited about that since it's just a forecast off the current rally and likely to change but it remains an interesting observation. For the record the S&P 500's all time high is 1,576 set in 2007.

Daily chart of the S&P 500 index:

Weekly chart of the S&P 500 index:

The NASDAQ composite index continues to impress with a rally to levels not seen since late 2000. You can see on the daily chart how the NASDAQ is still inside its narrow, bullish channel. If the market were to suddenly see a correction a -3% pullback would be 2,862 and a -5% pullback would be 2,803. The drop toward 2,860 would be close enough to fill the early February gap higher and the 2,800 level could act as round-number support.

Of course there is no guarantee that a correction would stop at -5%. Some like to compare the markets to a rubber band. The farther the band is stretched the harder and faster it snaps back. The good news is that everyone who bought the market, in this case the NASDAQ, near the 2011 highs has had their chance to sell and get their money back. At this point overhead resistance is probably the 3,000 level.

Daily chart of the NASDAQ Composite index:

Investors should take a moment to check out the Apple Inc. (AAPL) chart. It's the biggest stock by market cap at $468 billion and the biggest NASDAQ component. The incredible rise in shares of AAPL have played a key role in the NASDAQ's rally. Wednesday's performance in AAPL has created a bearish reversal pattern. Traders bought the dip on Thursday at the rising 10-dma so there hasn't been that much follow through yet but it does look like a classic blow-off top on both the daily and weekly chart. Fundamentally you could argue that AAPL is still cheap with a forward P/E of just 10.5 but that doesn't mean this stock can't see a correction. Of course the question is how big of a pullback would it see since so many investors would like to buy a dip.

FYI: AAPL has a shareholder meeting this week. The hot question is what will AAPL do with its $100 billion in cash? Will they buy somebody or issue some sort of special dividend or stock buyback program?

Daily chart of the AAPL:

Weekly chart of AAPL:

It was a bit of a rocky week for the small cap Russell 2000 index but the big bounce on Thursday helped push the $RUT to a +1.8% gain on the week. This index is now testing the top of its two-week trading range. A breakout higher will likely send it toward 850 or the 2011 highs. You can see on the weekly chart that the rally has stalled at the trend line of lower highs.

If the market should suddenly see a correction then a -3% pullback would be the 803 level and a -5% pullback would be 786. Of course the small cap index tends to be more volatile than the rest of the major indices. If stocks truly corrected lower I would not be surprised to see the $RUT drop toward the 775 area. Currently the $RUT is up 11.8% year to date, +16.9% from its December lows, and +37% off last October's low.

The recent sideways consolidation is arguably bullish and if the $RUT can break out higher it could lead the market's next charge. Further strength in small caps would also be a positive sign on money manager sentiment toward the market in general.

Daily chart of the Russell 2000 index

Weekly chart of the Russell 2000 index

One area of concern that does worry me is the action in the Dow Jones Transportation index. Traditionally Dow Theory suggests that we cannot have a prolonged market rally without participation in the transports. Unfortunately this sector has been drifting lower the last couple of weeks. This past week the underperformance rally stood out. Readers should note this as a potential warning sign that some of the market's internals are starting to falter.

Daily chart of the Transportation Average

The economic calendar this week is a lot quieter than last week. Honestly none of these reports will really matter with the market still focused on the upcoming deadlines for Greece.

- Monday, February 20 -
U.S. markets closed for holiday
an EU meeting on Greece

- Tuesday, February 21 -
weekly chain store sales

- Wednesday, February 22 -
MBA mortgage index
Existing home sales for January

- Thursday, February 23 -
Weekly Initial Jobless Claims
FHFA housing price index
Apple Inc. (AAPL) shareholder meeting

- Friday, February 24 -
(Final) Michigan Consumer Sentiment for February
New Home Sales for January

Additional key dates coming up:

Feb. 29th, ECB's 2nd round of LTRO 1% money offering
Mar. 1st, EU Summit Meeting
Mar. 20th, Greek deadline for $19 billion debt payment

The Week Ahead:

I have no doubt that you are sick of hearing about Greece but it remains front and center for investors. Last weekend Greece approved the latest round of austerity measures but that wasn't good enough. The new problem is doubts by the rest of the EU and eurozone that Greece will actually follow through on these austerity commitments. On Monday is a key meeting by EU finance ministers to vote on approval for the next bailout to Greece. Unfortunately a "yes" vote doesn't mean it's over. Greece still hasn't sealed the deal with its private investors who are now looking at a 70% haircut on their Greek bond holdings.

It seems that every day there are new twists in this Greek tragedy. This past week a major story was news that the ECB is swapping its $66 billion in Greek bonds for new ones that can't be restructured. If you're a private sector investors would you worry about Greece defaulting if suddenly you saw the ECB trying to protect itself from a Greek default by swapping its old Greek bonds for new ones that are guaranteed? That certainly doesn't paint a picture of confidence. Of course readers of this newsletter already know we are expecting Greece to default sooner or later.

Right now the big challenge is the upcoming March 20th deadline for Greece to make a 14.5 billion euro ($19 billion) debt payment. The Troika (EC, IMF, & ECB) is considering their options. One of them might be some sort of bridge loan to get Greece past this deadline before committing to any sort of larger bailout package. It's a question of how much money are you willing to throw away at this problem trying to kick the can down the road before you finally give up. Stocks could rally if there is some sort of decision made to get Greece past this March 20th deadline.

In other news we could see more and more headlines about oil. The situation with Iran is escalating. The country has been considering plans to cut its exports to certain European nations in retaliation for the West's growing sanctions against the country. There were headlines on Saturday that Iran had decided to stop selling crude oil to Britain and France. Oil exports account for the majority of Iran's revenue. Odds are they have already made agreements to sell this oil to someone like China. This news could produce a spike in oil prices, which have already been on the rise. This past week there have been a growing number of stories about record high gasoline prices this coming summer. A few analysts are expecting gasoline to rise from $3.50 a gallon to $4.25 in just the next six weeks. Many are expecting $4.50 to $5.00 a gallon by the middle of summer. If gasoline does hit $4.00 a gallon (or higher) it will be a major challenge for the U.S. economy since over 70% of the U.S. GDP is driven by consumer spending. Definitely something to think about as you make plans for summer.

The U.S. stock market's trend is still higher and there is nothing to stop it from growing more overbought. If EU ministers vote in favor of more aid to Greece on Monday then our markets could rally when they open on Tuesday. However, eventually stocks will see a correction. As LEAPS traders I would prefer to wait for some sort of correction before initiating new long-term positions. At the same time we have to weigh our desire to buy a pullback versus the reality of the bullish market in front of us. If you choose to put money to work in this market I would definitely start small to limit your risk.

- James