Funder managers would probably be happy if the year ended right here ten months early. The S&P 500 index was up near +10% for the year midweek. The slow drift higher continued with the Dow Industrials and the S&P 500 hitting levels not seen since the first half of 2008. The NASDAQ composite tagged the 3,000 mark, a level it has not seen since December 2000. Yet this is hardly the picture of a roaring bull market. Trading volume was low all week. WTI crude oil rallied to $110 a barrel midweek before a bounce in the U.S. dollar sparked some profit taking. Precious metals experienced volatile trading thanks to the dollar and comments from the Federal Reserve chairman. Gold futures were trading near $1,788 an ounce on Tuesday and fell more than -4% to $1,710 on Wednesday. Meanwhile, Apple Inc. (AAPL) saw its market cap hit half a trillion dollars, the largest of any company on earth.

Last week was a busy one for economic data. Some of the highlights were pending home sales for January jumped +2.0% versus expectations for +1.0% gains. The Conference Board's Consumer Confidence Index rallied from 61.5 in January to 70.8 in February, well past expectations for a small rise into the 62-63 zone. The U.S. Q4 GDP estimate was revised higher from +2.8% to +3.0% growth. Chicago PMI came in better than expected at 64.0 for February versus estimates for a mild drop to 60.0. Readings over 50.0 indicate growth. The Fed's Beige Book report was generally positive suggesting the U.S. economy continues to grow at a modest pace for the first quarter this year. Thursday saw relatively strong same-store sales numbers from many of the major retailers that still report this data. The weekly initial jobless claims were essentially unchanged for the week at 351,000.

In the not so great category we saw durable goods orders for January plunge -4.0% when economists were only expecting a -1.4% decline. The ISM manufacturing data fell from 54.1 in January to 52.4 in February. Economists had been expecting a rise toward the high 54s. Then there was Ben Bernanke, in his semiannual appearance before the House Financial Services Committee, making headlines. The FOMC chairman's comments failed to reassure the market that the Fed was planning any further quantitative easing (i.e. there was no hint of QE3 in his remarks). The U.S. dollar rallied following these comments and helped spark the sell-off in gold and silver.

One of the biggest events last week was the ECB's second round of three-year LTRO 1% money offerings. A week ago the general consensus was too much borrowing by European banks in this second LTRO offering would be seen as weakness and a troubling sign. Yet by Wednesday the view had changed and the "market" wanted to see banks taking advantage of this cheap money. Back in December the ECB loaned almost 490 billion euros to 523 banks. This past week that number jumped to almost 530 billion euros (about $713 billion) to over 800 banks, which was considered a success. The question is what will these banks do with the cash? The original concept was the ECB would loan money at 1% and banks would then turnaround and buy short-term bonds from struggling nations (like the PIIGS countries) at higher yields. New demand for this debt would bring down interest rates for these nations and help defuse the toxic debt time bomb (or at least delay it) while also lowering the borrowing costs for these countries struggling with dangerously high debt levels. It would be a win-win for everyone and it seemed to work back in December. The jury is still out on this latest effort.

Major Indices:

The S&P 500 index has spent more than two months rising in a narrow, bullish channel. The action this past week threatens a potential breakdown from this channel. The S&P 500 did hit new highs not seen since 2008 but they were never very convincing. Yet in spite of all the warnings that the market is tired and due for a pullback the S&P 50 is still trading above its rising 10-dma, a level traders have been using to buy the dip.

Is this rally tired? According to most of the momentum indicators the answer is yes. They have been stuck at overbought levels for weeks. At this point every dip lower seems to threaten the long-overdue correction. You already know that a typical bull-market correction is in the -3% to -5% range. Yet this market is so overbought we face a greater risk of a -5% to -10% drop. On a short-term basis I would still look for support near 1340, 1320 and the 1300 level.

If traders continue to buy the dip then a breakout past 1380 puts round-number resistance at 1400 as the next major target.

Daily chart of the S&P 500 index:

90 minute chart of the S&P 500 index:

The rally in the tech-heavy NASDAQ composite is also slowing down. If it had not been for another very strong +4.4% gain in shares of AAPL last week the NASDAQ may have posted a loss. I cautioned readers a week ago that the 3,000 level would probably act as round-number, psychological resistance. The NASDAQ is still in danger of a reversal.

The index is trading just outside its narrow bullish channel that began back in December. Furthermore Wednesday's intraday reversal at the 3,000 level is still looming. The index created a bearish engulfing candlestick reversal pattern. These normally need to see confirmation. Yet the last two days have seen the NASDAQ trade inside Wednesday's range. We could still see the NASDAQ breakdown, confirm the reversal pattern, and start a long overdue correction.

Sometimes the market is like a rubber band; the farther you stretch it one direction the bigger and faster it snaps back. That's my concern with the market's current rally off the December 2011 lows. On a short-term basis, if the market does correct, I would look for potential support near 2930 and then the 2900 level. If these levels fail then look for support near 2860, which is almost a -5% pullback from the 3,000 level.

While stocks tend to move faster going down than they go up the correction may not happen all at once. It took several weeks for the current rally to get this far. It could take a few weeks for any correction to run its course.

The second chart below is the NASDAQ-100 index ($NDX), which remains inside its narrow bullish channel (for now). That could change after AAPL's announcement on Wednesday since AAPL is such a large component of the $NDX.

Daily chart of the NASDAQ Composite index:

Intraday chart of the NASDAQ-100 index:

One of the most troubling events of the week is the performance of the small cap Russell 2000 index. The $RUT has been consolidating sideways for most of February. It appeared to breakdown on Wednesday and then Friday's drop only confirmed the breakdown. The 800 level could offer some round-number support but the path of least resistance, at least short-term, is now lower. This weakness in the $RUT is a good example of how we are losing leadership in the market rally. The list of stocks pushing the major indices higher is getting smaller and smaller. If the 800 level breaks, I would expect a correction toward the 775 area. You can see on the weekly chart how this looks like a failure and reversal at the trend line of resistance.

Daily chart of the Russell 2000 index

Weekly chart of the Russell 2000 index

We want to continue watching the Dow Jones Transportation Average. The sector underperformed most of February but started to bounce after testing the 5100 level. Rising oil prices are weighing on this group but a drop in oil on Friday failed to stop another day of selling for the transports. Has the oversold bounce just failed at the new trend line of lower highs? Does this mean the correction is not over yet? We won't know until we see the $TRAN breakout or breakdown. Just as many use the small cap Russell 2000 index as a sentiment indicator others use the transportation average as a sentiment indicator and a proxy for the economy. Future direction here depends on what happens with oil and that will be influenced by the U.S. dollar. Currently analysts are expecting the price of oil and gasoline at the pump to continue rising into summer, which would be bearish for transports and bearish for consumers.

Daily chart of the Transportation Average

Another chart we want to watch is Apple Inc. (AAPL). Shares have continued to rally with another +4.4% gain last week. This stock set a new record last week pushing AAPL's market cap to half a trillion dollars. It is now the largest company on the planet by market cap. Investors are bidding the stock higher in anticipation of a new product announcement this week on Wednesday. Most believe it will be a new iPad of some sort, maybe the iPad 2s or iPad 3. Regular traders of AAPL stock also know that AAPL tends to see a "sell the news" reaction to any product announcement. A sharp sell-off here could have a big impact on the NASDAQ-100 and NASDAQ composite.

Shares are up +50% from their late November 2011 lows. AAPL is definitely due for a correction. The first level to look for potential support would be the 10-dma near $526 but I would not expect that level to hold on any real pullback. The $500 level might be a good round-number, psychological level to watch.

Daily chart of Apple Inc. (AAPL)

We have another busy week of economic data in front of us. The key reports to watch are the ISM services, ADP employment report, and of course the nonfarm payrolls (jobs) report that comes out on Friday. Another potential market mover is the AAPL product announcement on Wednesday (see my comments in the prior paragraph).

- Monday, March 5 -
Factory orders for January
ISM Services index for February

- Wednesday, March 7 -
ADP employment report
Apple Inc. (AAPL) announcement (iPad 3 anyone?)

- Thursday, March 8 -
Weekly Initial Jobless Claims
Challenger mass layoffs report

- Friday, March 9 -
nonfarm payrolls (jobs) report for February
unemployment rate
Wholesale inventory data for January

Additional key dates coming up:

Mar. 20th, Greek deadline for $19 billion debt payment

The Week Ahead:

There are just over two weeks to go before Greece's March 20th deadline for its $19 billion debt payment. Right now the focus is on the Greek private sector investor vote to accept the 50% haircut on Greek bonds. If 66% of bond holders accept this deal then Greece will enact their "collective action clause" and force the remaining 34% to accept the same terms. This will likely result in lawsuits and those still holding onto their credit default swaps will try to collect. There was an uproar this past week then regulators claimed that this "voluntary" haircut would not trigger the CDS contracts. If this goes through it's going to cause a lot of concern over the entire CDS market, especially for European debt. What good are these credit default swaps if you can't collect on them when the country defaults?

I have been warning readers for weeks that my bigger concerns are not Greece but the other PIIGS countries. If Greece is allowed to cut its debt in half with this deal then Spain, Ireland, Portugal and Italy will all want the same deal. There are already accusations that Spain not trying to meet its budgetary targets. This way as the situation worsens it can try and work out a similar "soft" default on its massive debt load. The Greek story might be closing a significant chapter soon but this story of toxic European debt is far from over.

In other news the worry over rising gasoline prices continues to get play in the media. My question is this, if Wall Street was really worried about the impact of high gas prices on consumers then why is the RLX retail index setting at all-time highs? You would think investors would be selling the retailers.

Overall not much has changed from my comments a week ago at least for the big cap indices. The market's trend is up but momentum is teetering. The NASDAQ and the S&P 500 both look like they're on the verge of correcting lower. The only significant change is the relative weakness in the Russell 2000, which could be signaling the start of a market correction. At this point I would welcome a correction just to get it over with and relieve the market's overbought conditions. Now would be a good time to make a list of stocks you'd considering buy call LEAPS on following a -10% correction in their share price.

- James