The first full week of trading in 2014 ended on an up note in spite of a disastrous jobs report number. The major U.S. indices with the exception of the Dow Industrials all posted gains for the week. Financial stocks and transportation stocks, two key sectors, were showing relative strength and helped drive the market higher.

The Dow Jones Transportation Average closed Friday at a new all-time high. Meanwhile the bond market rallied on Friday's jobs number and the yield on a 10-year bond plunged to 2.86%. Gold, after suffering a terrible 2013 performance, is now up three weeks in a row. Investors sentiment remains bullish with the volatility index (VIX, a.k.a. fear gauge) closing at its lowest level in five months. If you like contrarian signals then that's probably a sign that investors are too bullish and we're near a market pullback.

Economic Data

We had a lot of economic data released last week but stocks ignored most of it. The last look at wholesale inventories increased +0.5% in November. That's down from a +1.3% gain in October. The ISM non-manufacturing (services) index slipped from 53.9 to 53.0 when economists were expecting a rise to 54.7. Numbers above 50.0 suggest growth.

Employment data was the key metric everyone was watching. The ADP employment change report (private payrolls) said corporations added 238,000 jobs in December, which was better than the 200K estimate. This helped support the expectation that the government's jobs report would come in near the +195,000 estimate. Unfortunately that didn't happen.

The BLS released their non-farm payroll report on Friday morning that showed the U.S. only added +74,000 new jobs in December. This was the lowest jobs number since April 2012, which came in at +68,000. Normally a jobs number this bad would have sparked serious selling in the stock market and yet investor reaction was muted and the major indices all closed higher on Friday, minus the Dow Industrials.

Some of the whisper numbers for Friday's report were as high as +250K. On the positive side we did see November's number get revised from +203K to +241K. On the negative side of the +74K new jobs in December over half of them were all temporary jobs. Now the headline unemployment rate number plunged from 7.0% to 6.7%. That looks like good news and marks the lowest unemployment rate since October 2008. Sadly the reason this number is dropping is disheartening. That's because 347,000 people have dropped out of the workforce and stopped looking for a job. This has pushed the labor participation rate from 63.0% to 62.8%, the lowest level since March 1978. In reality, if we look at the U6 unemployment rate, which also includes the underemployed, then U.S. unemployment is about 13.1%.

The analyst community initially tried to blame the poor jobs number on the extremely cold weather. While December was colder than normal it does not account for the huge miss. After a recent string of relatively decent jobs reports we could argue that one bad report doesn't make a trend. At least one market pundit, the insightful Barry Ritholtz, has suggested that the financial media places too much emphasis on the monthly report. He estimates that trying to calculate the monthly changes between hiring and firing in a labor force of almost 150 million people equates to about one tenth of one percent.

What will be interesting to watch is how the Federal Reserve reacts to the jobs data. This significantly lower December jobs number could be a problem. The Fed has previously suggested that they might start raising interest rates when the unemployment rate hits 6.5%. Suddenly we are at 6.7% and the economy is still slowly trudging along. Prior guidance has suggested that the Fed is still a long way off (at least 2015) before they start raising interest rates. They Fed might be forced to adjust their guidance. Worse case the Fed might choose to actually increase stimulus again instead of tapering their QE program. The next Fed meeting is January 29th.

Overseas Data

Last week saw a lot of economic data overseas. I'll try to just hit the highlights. The European Central Bank (ECB) kept interest rates unchanged at 0.25%. The Eurozone saw its GDP increase +0.1% quarter over quarter. Retail sales in the Eurozone rose +1.4% month over month, which was better than expected. The unemployment rate for the Eurozone was unchanged at its all-time high of 12.1%.

The Eurozone's largest and strongest member, Germany, had lots of good news. Retail sales surged +1.5% for the month, which was above expectations. German industrial production came at +1.9%, also above estimates. Standard & Poor's rating agency said Germany gets to keep their "AAA" credit rating. We also saw good news from France and Spain where both countries said their industrial production improved significantly better than expected. On the downside Italy said unemployment rose from 12.5% to 12.7%. Greece saw its industrial production side for the fifth month in a row and its unemployment hit a new all-time high of 27.8%.

Looking east toward Asia most of the headlines were out of China. The latest look at inflation at the consumer level, the CPI, rose +0.3% in China. The year over year reading put the CPI at +2.5%. Yet the wholesale gauge of inflation, the PPI, dropped -1.4%. China reported that its exports rose +4.3% year over year and its imports rose +8.3%. Concerns over their slowing export numbers helped keep Chinese stocks in the red and the Shanghai composite closed the week at five-month lows.

Major Indices:

The S&P 500 index spent most of the week churning sideways inside the 1830-1843 area. The index posted a +0.6% gain for the week and actually looks poised to breakout past the 1843 level and challenge its Near Year's Even high near 1850.

The 1850 level could be potential round-number resistance. If the S&P 500 does breakout past this level the next resistance level could be 1870. If stocks reverse then we can look for likely support near 1820 or the 1800 level. The simple 50-dma should provide extra support near 1800 if stocks turn lower.

chart of the S&P 500 index:

The NASDAQ composite displayed relative strength with a +1.0% gain for the week. The NASDAQ closed 2013 at 4,176. Friday's intraday bounce leaves the NASDAQ poised for a bullish breakout to new 13-year highs. If this index does push higher then the 4200 level could be round-number, psychological resistance. If stocks reverse on us then we can look for potential support at 4100, 4050 and the 4000 level.

chart of the NASDAQ Composite index:

The small cap Russell 2000 index almost kept pace with the rally in the NASDAQ with a +0.7% gain last week. It was encouraging to see the $RUT close at its high for the week and the index is ready to breakout to new all-time highs. However, I will point out that there is at trend line of higher highs that could prove to be resistance again (see chart). If we're just looking at levels then the 1180 and 1200 levels are the most likely areas to watch for potential resistance. Should the market turn south then watch for potential support in the 1120-1140 zone.

chart of the Russell 2000 index

Economic Data & Event Calendar

We will see another busy week of economic data. The retail sales number on Tuesday could be a disappointment. Federal Reserve Chairman Bernanke will speak on Thursday. The title of his talk is "Challenges for the Central Bank". The Federal Reserve will also release their Beige book and the Philly Fed survey this week. Yet all of this data will likely be overshadowed by earnings season. The pace of earnings picks up significantly. We will hear from a number of large financial companies on Tuesday and Wednesday.

Economic and Event Calendar

- Monday, January 13 -
the pace of Q4 earnings season gets faster

- Tuesday, January 14 -
U.S. retail sales for December
business inventory data

- Wednesday, January 15 -
Producer Price Index (PPI)
New York Empire State manufacturing index
Federal Reserve Beige Book

- Thursday, January 16 -
Weekly Initial Jobless Claims
Ben Bernanke to speak
Consumer Price Index (CPI)
Philadelphia Fed survey
NAHB Housing Market Survey

- Friday, January 17 -
housing starts & building permits from December
U.S. Industrial Production
University of Michigan Consumer Sentiment survey

Additional Events to be aware of:

Jan. 20th - stock market closed for Martin Luther King day
Jan. 28th - President Obama's state of the union address
Jan. 29th - FOMC policy update
Feb. 7th - U.S. debt ceiling is reached

Looking Ahead:

The last few weeks I've been pointing out multiple warning signals that the market could be nearing a potential top. Yet in spite of all the signs the market continues to drift higher. That's not too surprising. Momentum tends to beget more momentum. When the market is ready to correct lower it will choose some event as a catalyst and suddenly investor sentiment will change. I have suggested that a disappointing Q4 earnings season could be that catalyst for profit taking and we're about to find out. The next two to three weeks could be pivotal for the market as we digest the flood of earnings data and corporate guidance for 2014.

There was an interesting note out from Goldman Sachs this past week that suggested the market is fully valued at current levels. Currently Goldman is only forecast a 1900 price target on the S&P 500 by 2014's yearend. That's only 58 points away (that's another +3.1%). It could be a disappointing year if they're right.

My suggestion is to trade cautiously as we enter earnings season. Individual stocks could get hammered if they disappoint the market. Hopefully some of these post-earnings sell offs might provide us some entry points to buy LEAPS. In the meantime we can only trade the market we see and not the market we expect.