The first quarter of 2012 is in the books and it was a good one for stock investors. The talking heads on TV were giddy about the fact it was the best Q1 performance for stocks since 1998. The market did manage another gain for the week, pushing the S&P 500 up 11 out of the last 13 weeks. Overall it was a quiet week for economic data and headlines and most of the economic data we got was flat or bearish.

Early in the week the market was focused on healthcare as the U.S. supreme court held a three-day review of Obamacare. They are not expected to issue a ruling until summer but the tone of questioning suggested the individual mandate could be struck down. Later in the week the people turned their focus toward the mega-millions multi-state jackpot which hit a record-setting high of $640 million. If you're wondering, there are three winning tickets. One in Illinois, Kansas, and Maryland.

Getting back to the stock market this past week looked a lot like the prior week. Gains on Monday and Friday were bookends to a mid-week decline. The first quarter saw the Dow Industrials raise +8.1%. The NASDAQ composite rallied +18.6%, which just outpaced the XLK technology ETF's gain of +18.5%. Both the S&P 500 and the small cap Russell 2000 index gained +12.0%. The SOX semiconductor index rose +20.0% and the XLF financial ETF soared +21.5% in the first quarter. One of the most disappointing performances was the Dow Jones transportation average, which only gained +4.6% for the quarter. In Europe the major indices were up about +7%. Meanwhile the Japanese NIKKEI index rallied about +20% for its best quarter in 24 years.

Helping fuel stock market gains last Monday were comments out of Fed Chairman Ben Bernanke that suggested the Fed is still leaning toward further easing. Many are expecting some sort of announcement out of the FOMC's late April meeting. Speaking of the Federal Reserve the Chicago, Dallas, Kansas City, and Richmond Fed Reserve business survey's all came in below expectations. Elsewhere the Chicago PMI fell from 64.0 in February to 62.2 in March. The internal components for this index showed a drop in new orders and a drop in employment. The weekly initial jobless claims ticked higher with a +9,000 jump to 359,000, which was worse than expected.

The final Q4 GDP estimate was unchanged at 3.0%. The durable goods orders for February came in at +2.2% but economists were expecting a +3.0% rise. The prior month was revised up to +3.6%. Housing data last week was disappointing with pending home sales for February falling -0.5%. The Case-Shiller 20-city price index dropped to its lowest level since 2003. The University of Michigan consumer sentiment for March ticked up from 74.3 to a final 76.2, marking its seventh month of gains. Yet the Conference Board's consumer confidence index fell from 71.6 in February to 70.2 in March. Personal income for February rose +0.2% and personal spending rose +0.8%. Economists were expecting +0.3% in income and +0.6% in spending.

Overseas the United Kingdom adjusted its Q4 GDP estimate lower to -0.3% growth. The latest Germany IFO business confidence survey rose to its best levels since last July in spite of falling German retail sales data. Italy's consumer confidence data hit an eight-month high. Meanwhile Canada has decided to follow countries like Australia, Brazil, Israel, New Zealand, and Sweden, and eliminate their one-cent coin. The Canadian penny will remain legal tender for now but the country will stop minting them since they cost 1.5 cents to manufacture. There have been several attempts in congress to eliminate the U.S. penny but it never seems to gain any traction.

Major Indices:

The S&P 500 is up 11 out of the last 13 weeks. Even though the index hit a new multi-year high on Tuesday morning near 1,419 it seems like upward momentum is fading. The MACD and stochastics indicators on the daily chart are suggesting a potential correction lower. On the daily chart below you can see that the bottom of its prior channel is now acting as resistance. Of course the bulls will point out that the trend of higher highs and higher lows remains intact. The real question is now that the first quarter is over will there be any window "undressing" as fund managers unwind positions.

Given the current bull market environment we can look for brief -3% to -5% corrections. At this point that would be a dip to the 1376-1348 area. Although I suspect that the prior highs from 2011 in the 1370-1360 zone could be support. Overhead the next level of potential resistance is the 1430-1440 area.

Daily chart of the S&P 500 index:

The NASDAQ outperformed the other major indices with a +18% gain for the quarter. This index is overbought and is due for a correction. Furthermore the weekly chart definitely looks like it's showing a potential top. However, that's no guarantee that the NASDAQ is going to reverse. The trend of higher highs and higher lows is still in effect. I would expect potential resistance at 3150 and 3200. We can look for short-term support at 3050, at 3000, and near the 50-dma. Yet a -3% to -5% correction would mean a dip into the 3040-2975 range.

Weekly chart of the NASDAQ Composite index:

Trading in the small cap Russell 2000 index is showing mixed signals. On the weekly chart the $RUT has broken out past key resistance and should be poised to move higher in spite of last week's lousy performance. Yet the daily chart shows a potential bear wedge pattern forming. A breakdown under 820 and its 50-dma would definitely look bearish for the small caps although I suspect the 780 area with the 100-dma, 200-ema, and 300-dma all seem to be converging will probably be support.

Daily chart of the Russell 2000 index

Weekly chart of the Russell 2000 index

The Dow Jones Transportation Average ($TRAN) has not been very supportive. Two weeks ago the transports topped out under resistance near 5400 and they have been slipping under a short-term bearish trend of lower highs. Is this sector forming a bearish double top? Or is it forming a sideways trading range in the 5100-5400 area?

If the situation with Iran heats up and we see oil prices rise again it could put pressure on the transports. Why are transports important? Dow Theory would suggest that if the economy is healthy then the transports should be healthy as well since they are moving freight around the country. Weakness in transports would suggest the economy is struggling.

chart of the Transportation Average

Shares of Apple Inc. (AAPL) have helped keep the rally in technology and the NASDAQ alive. It's the largest stock by market cap and it just hit a new all-time high over $620 a share last week. When this stock corrects, and eventually it will, it's going to put a lot of downward pressure on the major indices. It looks like a key area to watch might be the $520 level although I suspect the $550 level might offer some support.

Daily chart of the Apple Inc. (AAPL)

We have a busy week of economic data in front of us. We'll see both the ISM and ISM services index. Vehicle sales come out on Tuesday. Analysts will scour the FOMC minutes from the last meeting for any hint of QE3. As the first week of the month of April we'll see the ADP employment numbers and the government's nonfarm payroll (jobs) report on Friday. Plus, the U.S. market is closed on Friday in observance of Good Friday.

- Monday, April 2 -
ISM Index
construction spending

- Tuesday, April 3 -
Factory Orders
FOMC minutes from the last meeting
auto and truck sales

- Wednesday, April 4 -
ADP Employment report
ISM Services index

- Thursday, April 5 -
Weekly Initial Jobless Claims

- Friday, April 6 -
stock market closed for Good Friday
nonfarm payroll report
unemployment rate

Upcoming events:

April 10th, Alcoa (AA) unofficially kicks on Q1 earnings
April 24th FOMC meeting
April - Greek election

The Week Ahead:

Looking ahead we have a market that is overbought and bearish sentiment has fallen to a seven-week low. Investors might be deemed complacent with the "fear index" or volatility index (VIX) near multi-year lows. After a massive rally in the first quarter you can bet that odds are growing we could see traders sell the news when corporations start announcing earnings.

We only have a couple of weeks before Q1 earnings season beings. Dow-component Alcoa (AA) will kick off earnings season on April 10th but earnings season doesn't really hit full swing until April 16th. So what happens between now and the onset of earnings season? The beginning of the month should see an inflow of money from mutual funds. Seasonally April tends to be a bullish month but there have been down years.

If I had a crystal ball I suspect it would show me that stocks churn sideways for a couple of weeks as investors wait for earnings season to begin. Then once earnings begin we'll see investors start to sell on the disappointing earnings data. The market could see a few spikes on the news but look for traders to sell into strength. Essentially earnings season will be the excuse to sell and lock in gains and act as an early signal to cue the "sell in May" trend. Of course all this could change if we see some sort of event overseas. Everyone is aware that military action could breakout with Iran but most don't suspect any possible escalation until summer. That leaves China and Europe.

Last week the market was struggling with concerns over a slowdown in China and what that might do to the global economy. Concerns over China remain and are unlikely to change any time soon. China's largest trading partner is Europe and Europe is slowing down, which means less demand for Chinese products. Speaking of Europe the toxic debt issue in Europe could flare up again. Greece may be on the backburner but Spain is heating up. Germany just agreed to a stronger "firewall" of up to 800 billion euros in the combined EFSF/ESM programs just as Spanish bond yields are creeping higher again. Greece was a small country with a very small economy. Spain is another story and a meltdown in Spain, while still a ways off, would seriously rock the boat for both Europe and the U.S.

Longer-term we're starting to hear talk about a "fiscal cliff" for the U.S. on January 1st, 2013. The Pragmatic Capitalism blog explained that the expiration of the Bush tax cuts, payroll tax cuts, and emergency unemployment benefits on the first day of 2013 could put a -2% to -3.5% drag on the U.S. GDP. Plus, if last summer's showdown over the rising U.S. debt limit wasn't enough we'll get to go through that process again.

Looking forward to this spring and summer we will likely have rising gasoline prices putting pressure on consumer spending. Plus we'll have a nasty presidential election going on. The fact that we could have a change of leadership in Washington might actually stall business spending as corporations wait to see who wins. We all know that a bull market likes to climb the wall of worry. We definitely have a lot of potential potholes for the market but none of them are guarantees of a market downturn. Q1 earnings results could surprise to the upside (but I doubt it). Furthermore the Federal Reserve could announce some kind of QE3 at the April 24th meeting. If they do then stocks will likely rally on the news. If they don't then it could spark a new round of selling pressure.

I remain cautious when it comes to launching new long-term bullish positions. The trend is still up but stocks are overbought and the Q1 earnings season could be the excuse traders need to sell stocks and lock in gains. If we actually see a decent -5% to -10% correction then we could use it as a new bullish entry point.

- James