It was a week of new highs for the big cap U.S. indices. The S&P 500 extended its run to six weekly gains in a row. The S&P 500, Dow Industrials and Dow Transportation average all hit new record highs. The NASDAQ hit new 13-year highs. The small cap Russell 2000 index has been lagging but the trend remains higher. The bond market had a shortened week after being closed for Veteran's day. U.S. treasuries managed a small bounce with the yield on the 10-year note at 2.70%. The U.S. dollar spent most of last week drifting lower but that failed to have much impact on commodities like gold, silver, and oil. Crude oil is actually posting its longest losing streak since 1998. Some of the market's best performers last week were the transportation stocks (+2.76%), the brokers (+2.39%), housing stocks (+3.5%) and the biotech industry (+4.4%).

Economic Data

U.S. economic data was mixed last week. Industrial production actually fell -0.1% in October. This was after the September reading was revised higher from +0.6% to +0.7%. Considering the first half of October was plagued by the partial government shutdown this report could be seen as positive. U.S. wholesale inventory data showed an increase of +0.4% in September. The August reading was adjusted higher from +0.5% to +0.8%. Meanwhile the New York Empire State manufacturing survey was a negative surprise. Economists were expecting this fed regional survey to improve from 1.5 to 4.5 but the New York area saw a drop to -2.2. This is the lowest level since January.

The U.S. markets were also digesting the Janet Yellen Federal Reserve Chairman nomination hearings before the U.S. Senate. Yellen offered a dovish tone and stocks rallied. She acknowledged that QE can not last forever but it would be dangerous to taper the program while the economic recovery was still fragile. This could have been a hint that the Fed is worried about how another U.S. budget and debt ceiling battle in December and January could hurt the economy and the markets. When asked if the stock market was a bubble Yellen responded with a no and argued that valuations do not appear to be extreme. We can sum up her nomination hearing with one sentence. According to Yellen the Federal Reserve still has more work to do. The stock market decided to interpret her comments to mean that any taper to the Fed's QE program is still months away and unlikely to happen any time soon. Or as Wayne Campbell used to say, "Party on, Garth!"

Overseas Data

Economic data overseas was also mixed. Eurozone industrial production contracted -0.5%, which was worse than expected. Germany's Q3 GDP came in at +0.3%, which was in line with estimates. Yet France and Italy's GDP both contracted -0.1%. Overall Eurozone GDP inched up +0.1%, which is its second quarter of positive growth in a row (assuming it doesn't get revised lower in the future). We could be hearing more about Italy soon. The EU gave Italy a warning about its excessive debt load.

In Asia the data was mixed as well. China said its industrial production rose +10.3%, which was better than expected. The latest inflation data for China came in at +0.1%. Japan said their core machinery orders plunged from +5.4% to -2.1%, which was worse than expected. Japan's GDP growth has slowed from an annual pace of +3.8% down to +1.9%, which is a bit alarming. Yet it does mark the fourth quarter in a row of positive GDP growth. The Japanese NIKKEI stock index hit new four-month highs last week.

Major Indices:

The S&P 500 index helped lead the way higher with a bullish breakout past resistance near the 1775 mark. For the week the S&P 500 is up +1.5% but it's up +9.2% from its early October intraday low at 1646. I mentioned earlier that the S&P 500 is now up six weeks in a row. Odds of it hitting seven up weeks in a row is slim. The index is about to test round-number, psychological resistance at the 1800 mark. There is a good chance that the S&P 500 could tag this level and then retreat as traders take profits. Fortunately, broken resistance near 1775 should be new support.

This index is at new all-time, record highs and it's hard to say what resistance might be above 1800. Should we see the index breakout past this level I would expect potential resistance in the 1820-1825 area. Year to date the S&P 500 is up +26.1%.

chart of the S&P 500 index:

The NASDAQ has continued to bounce following its November 7th plunge. The index spent a couple of days retesting the 3900 level as support and then surged to a new 13-year high. Now the NASDAQ composite is nearing likely round-number, psychological resistance at the 4,000 mark. Just like the S&P 500 the NASDAQ could tag the 4,000 level and then retreat as investors take some money off the table. If the NASDAQ does see a pullback we can look for short-term support near 3900. Year to date the NASDAQ is up +32.0%.

chart of the NASDAQ Composite index:

The large cap S&P 500 index is hitting new all-time highs and the NASDAQ is hitting new 13-year highs. Yet the small cap Russell 2000 index is lagging. The index has been bouncing from its November 7th lows but it has yet to breakout to a new high. Fortunately the overall trend remains very bullish. I would be worried if we saw the $RUT fail near its late October highs in the 1120-1125 area, which is the next level of resistance. Beyond that the 1140, 1160 or the top of its bullish channel is the next level of overhead resistance (see chart). Year to date the $RUT is up +31.4%.

chart of the Russell 2000 index

Economic Data & Event Calendar

We have a relatively quiet week for economic data. The biggest reports are probably the FOMC minutes and the Philly Fed survey. Honestly I don't expect either to be a real market mover. We will see the latest U.S. inflation data with the CPI and PPI.

Economic and Event Calendar

- Monday, November 18 -
NAHB housing market index

- Tuesday, November 19 -
employment cost index
German ZEW index
Federal Reserve Chairman Ben Bernanke speaks

- Wednesday, November 20 -
Retail sales data for October
Consumer Price index (CPI) inflation data
existing home sales data for October
FOMC Minutes from the last meeting
weekly MBA mortgage application index

- Thursday, November 21 -
Weekly Initial Jobless Claims
Producer Price Index (PPI) wholesale inflation data
Philadelphia Fed survey

- Friday, November 22 -
(nothing significant)

Additional Events to be aware of:

Nov. 28th - U.S. markets are closed for Thanksgiving holiday
Nov. 29th - U.S. markets close early.
Dec. 17th - FOMC meeting & economic forecasts update
Dec. 17th - post-FOMC meeting Ben Bernanke press conference
Dec. 24th - U.S. stock market closes early
Dec. 25th - U.S. stock market closed for Christmas

Looking Ahead:

Looking ahead I see challenges in just the next few days, potential challenges between now and the end of the year, and challenges in early 2014. On a short-term basis the S&P 500 index, the Dow Industrials, and the NASDAQ composite index are all about to hit potential round-number resistance. The S&P 500 is poised to hit 1800. The Industrials are about to hit 16,000. The NASDAQ is about to hit 4,000. There is a good chance this could all happen on Monday.

Now there is nothing magical about these levels. It's just that humans like big round numbers to aim for. Once the index (or stock) gets there it could be an excuse or target to sell and take some money off the table. It's possible the indices tag these levels and just keep right on climbing. However, I would bet that we see the indices hit these levels and then retreat. I suspect any pullback will be shallow. Most fund managers are dreadfully behind the gains seen in the market this year and they will be buying any dip to try and accelerate their gains between now and year end.

It just so happens that the major U.S. indices could hit these big round-number resistance levels following a multi-week rally. Thus the market is already overbought and due for a little correction. The S&P 500 is up six weeks in a row. According to Tom Bulkowski, of the Encyclopedia of Chart Patterns, the odds of the market stretching their gains to seven weeks in a row is just five percent. It has only happened twice in the last ten years and we've already seen it happen once this year (about January 2013). Another issue is investor sentiment. A poll of financial newsletter writers has seen the level of bearish sentiment hit the lowest levels since 1989. From a contrarian standpoint this is a sell signal.

Potential challenges we face between now and yearend is the Christmas holiday shopping season and more fireworks out of Washington D.C. This year there are six less shopping days before Christmas, making it the shortest holiday shopping season since 2002. Fewer days means fewer opportunities for consumers to shop and likely less spur of the moment purchases. One positive factor for the holiday shopping season is gas prices. Fuel prices have been falling for weeks and gas is down more than -10% in less than three months. Cheaper gas prices means more discretionary funds for gift buying. Unfortunately, the drop in gas prices may not help. A recent Gallup poll found out that U.S. consumers are actually planning on spending -10% less on Christmas than they did last year. They plan to spend almost -20% less than they did from 2007 spending levels. I applaud the idea of consumers spending less as a matter of personal discipline but it does not bode well for the U.S. economy that is fueled by consumer spending.

We also face another showdown in Washington over the U.S. budget and debt ceiling debate. The last showdown merely kicked the can down the road a few weeks. Back in October our politicians agreed to fund the U.S. budget through January 15th, 2014 and raised the debt ceiling through February 7th, 2014. The democrats and republicans are supposed to compromise on a new budget by Friday, December 13th. That just happens to be the target date for congress' last day of work this year (before their holiday recess). Odds of the two sides coming together on an agreement by December 13th is virtually zero. The negative headlines from this even could sour any potential yearend market rally.

Looking out farther into the first quarter of 2014 the market will likely obsess over when the Federal Reserve might taper its current QE program. Currently most pundits are expecting the Fed to begin tapering in late Q1 2014 or some time in Q2 but that could change if we see another government shutdown or the U.S. economy stall. Although at the moment the U.S. economy seems to be picking speed, albeit very slowly.

I mentioned last week that historically when the market is up more than +10% through October the last two month of the year tend to average another +4.5% gain. Thus far we are definitely on track to see the rally continue through year end.