The market endured the first full week of Q4 earnings season and closed relatively flat for the week. We saw some volatility early on with big swings on Monday and Tuesday but there was no follow through either direction. Investors seem to be digesting the mix of earnings news and economic data. The S&P 500 closed Friday with less than a four-point loss for the week. Biotech stocks were some of the best performers (+3.5%) while housing stocks underperformed (-2.1%). The U.S. dollar is bouncing but that has not stopped oil prices from bouncing off their recent lows nor has the dollar rally hindered the rebound in gold prices.

Economic Data

Most of the economic data was positive last week. Housing starts and permits were the exception. New construction permits fell from 1.1 million to a 999 thousand pace in December. Analyst blamed the dip on harsh cold weather. Housing starts slipped with single family starts falling -7% and multi-family starts plunging almost -15%. Consumer sentiment was also an underperformer. The University of Michigan consumer sentiment survey for January fell from 82.5 to 80.4. Economists had been expecting a rise to 83.5. Both the present conditions component and the expectations component stepped backward.

There were two federal reserve surveys. The Philadelphia Fed survey for January improved from 6.4 to 9.4. The New York Empire State manufacturing survey soared from 1.0 to 12.5. Both surveys displayed better than expected readings. The Fed also released their Beige Book report, which showed that economic activity continued to expand at a moderate pace.

Consumer-level inflation in the CPI rose +0.3%, which happened to be the biggest jump since June. Meanwhile wholesale-level inflation in the PPI rose +0.4% with gains being driven by a rise in energy prices. The U.S. continues to see improvement in its industrial production. The December data showed industrial production rising +0.3% following a +1.0% gain in November. This is the fifth consecutive month in a row of gains.

Overseas Data

Most of the economic data overseas was either positive or benign. The Eurozone said their consumer price index (CPI) rose +0.3% for the month, which pushed the year over year reading to +0.8%. Industrial production for the Eurozone zone improved +1.8% for the month, which was better than expected. Great Britain reported that their retail sales rallied +2.6% in December, which is significantly above forecasts.

In the not-so-great news category, rating agency Standard & Poor's lowered their outlook on Portugal from creditwatch negative to negative. We could be hearing a lot more about the PIIGS countries in 2014 as they continue to struggle. The market worried for years that Greece may default on its massive debt. It looks like that could happen in 2014. Greece continues to receive bailout money from the Troika (EC, IMF, and the ECB) yet the vast majority of this assistance goes to paying the interest on the previous bailout loans. It's like Greece is getting a cash advance on its credit card to make the minimum payment on its credit card balance. This can't go on forever. Greece has some significant bills due in May so the situation could implode before summer.

Data out of Asia was quiet last week. Japan said their core machinery orders climbed +9.3% for the month, which was better than expected. Yet household confidence in Japan slipped from 42.5 to 41.3, which was worse than expected. Meanwhile government officials in China reaffirmed their expectations for 2014 GDP to come in around +7.5% growth.

Major Indices:

Last Monday's plunge in the S&P 500 index stopped at its rising 30-dma. There was no follow through lower. Instead the index produced a sharp, two-day bounce but the bounce stalled at resistance near 1850. This large cap index closed the week with a -0.2% decline. The long-term trend is still higher but momentum is clearly slowing.

Looking at price levels on the S&P 500 there is clear resistance at 1580 and you could argue that the index just created a short-term bearish double top although I think it's a bit early to make that declaration. If the S&P 500 does push higher I would look for potential resistance in the 1870-1880 zone. The 1900 mark could definitely be round-number, psychological resistance.

If this index were to see a pullback there seems to be some short-term support near 1815. There is also technical support at its rising 50-dma (currently at 1807). A normal -3% to -5% pullback would mean a drop toward the 1795-1757 range. A -10% correction would be 1665.

chart of the S&P 500 index:

The NASDAQ composite also experienced a sharp sell off on Monday but the two-day bounce that followed lifted the index to new 13-year highs. The NASDAQ ended the week with a +0.5% gain. It's possible the 4180 area might be short-term support but if the market actually dips I would expect a deeper pullback in the NASDAQ. Look for support near 4100 again. If the NASDAQ can keep the rally alive then 4250 and 4300 are natural levels to watch for potential resistance.

chart of the NASDAQ Composite index:

The small cap Russell 2000 index delivered a move similar to the NASDAQ's The big two-day bounce midweek pushed the $RUT to new all-time highs. Big picture the $RUT is still climbing within its long-term bullish channel. On a more short-term basis it is nearing the multi-month trend line of higher highs, which could prove to be resistance again.

I would expect resistance near 1180 and the 1200 levels. Look for support in the 1140 area and/or its simple 50-dma.

chart of the Russell 2000 index

Economic Data & Event Calendar

Ahead of us appears to be a very quiet week for economic data. The only real reports are the Chicago area and Kansas City area Federal Reserve regional surveys. Odds are that the major headlines this week will be dominated by corporate earnings news.

The U.S. markets are closed on Monday for Martin Luther King day. Most of our schools, banks, and the government will be closed for the holiday.

Economic and Event Calendar

- Monday, January 20 -
stock market closed for Martin Luther King day

- Tuesday, January 21 -
Bank of Japan interest rate decision

- Wednesday, January 22 -
HSBC China PMI data

- Thursday, January 23 -
Weekly Initial Jobless Claims
existing home sales
Eurozone PMI data
Chicago Fed national activity index
Kansas Federal Reserve Manufacturing survey

- Friday, January 24 -
(nothing significant)

Additional Events to be aware of:

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:

Looking ahead this coming week should be all about earnings. Normally about 69% to 70% of S&P 500 companies manage to beat Wall Street's earnings estimates. Thus far only about 50% have managed to beat estimates. Corporate guidance has not been very encouraging. Honestly, after just one week of lackluster results I am surprised the market is holding as well as it has. Fortunately the results from the major financial institutions have been generally okay and could be keeping investor bullishness alive.

Odds are we are merely witnessing the growing trend of corporate America beating earnings estimates and then lowering guidance in an effort to lower their bar for the next quarter so they can do it again (beat Wall Street's lowered estimates, lower guidance). The lack of reaction in the stock market might be a reflection of investors who are in on this game or just desensitized to the practice. We still have another three or four weeks full of earnings announcements. Investors could be in a wait-and-see mood. I warned investors last week that the last two weeks of January could be pivotal as the market digests all of the Q4 earnings data and guidance.

I also warned readers last week that Goldman Sachs had issued some cautious comments about the market's ability to keep the bull market alive. Now it is Citigroup's turn to issue a warning that the market could be nearing a top. There has been a growing concern about market breadth. Fewer and fewer stocks are hitting new 52-week highs and fewer stocks are trading above their 50-dma and 200-dma. That means market leadership is narrowing. In the Option Investor newsletter market wrap, Jim pointed out some interesting numbers. He shared, "We have not had a 20% correction in 835 days and no 10% correction since August 2011. We came close in May 2012 at -9.9% so in my book that would be close enough. Even so that means it has been 19 months since a 10% dip. Historically we average a 10% dip about 2.2 times a year. That means we are long overdue."

If we step back from the day to day noise the market's trend is still higher but the equity markets will see a correction eventually. Nearly everyone expects at least a -10% correction some time in 2014. That's not super helpful. That's like saying there will be a big storm sometime in 2014. We don't know when but it's going to show up. Does that mean you carry your umbrella with you every day? Probably not. However, there is a growing list of warning signs that the market seems to be nearing a top. Depending your perspective one could argue it based on technicals or valuations.

The next few weeks could be significant. We will see another FOMC meeting in late January and in February we will see the U.S. debt ceiling debate rise up in Washington again. I am suggesting investors take a step back from the market and take a cautious approach to launching new positions. Let's wait and see if stocks produce a pullback.