The month of February 2014 is now in the books and it turned out to be a positive one for stocks. It didn't start out that way. After a sharp sell-off in late January the U.S. markets shot lower again early February. However, the S&P 500 index found support near 1740 and has produced an almost non-stop rebound from its February lows.
This past week saw the S&P 500 struggle to breakout past its old highs but that changed on Thursday. After Fed Chairman Janet Yellen completed her semiannual testimony before the Senate Banking Committee on Thursday stocks ended on a high note. The market managed to weather some alarming headlines on Friday regarding Russia's military move into the southern part of Ukraine. The Dow Industrials had their best month since January 2013 but are still more than 200 points from new highs. Meanwhile the S&P 500 and Russell 2000 tagged new all-time highs and the NASDAQ composite hit new 14-year highs.
Two weeks ago Ukraine was making major headlines as its government started firing on protestors that eventually toppled what many are calling its corrupt Russian-backed government. Here we are, a week later, and Russia is taking advantage of the power-vacuum in Ukraine and sending troops into the Crimea, Ukraine's southern peninsula.
Early reports described camouflaged men without any insignia, in full combat gear, carrying AK-47s and sniper rifles, had seized Crimea's two airports. These soldiers also seized Crimea's parliament building, a television station, and telecom company. This followed less than 24 hours after Russian president Putin had launched snap drills for 150,000 Russian soldiers, including 900 tanks, on the border of Ukraine and Russia.
Russia already has a major naval base at Sevastopol, on the southern tip of Crimea, with a lease from the Ukraine through the year 2042. Russia already had a military presence in the area. This "invading" force met very little resistance since most of the locals support Russia. A 2001 poll found that 58% of Crimeans identified themselves as Russian.
Russia claims the movement of men and military vehicles into Crimea were necessary to ensure the security of its naval base. However, the amount of men and machines has ballooned to over 6,000 soldiers in the last 24 hours. Russian Parliament has given unanimous approval for military action while the Ukraine leadership is calling it an invasion and an act of war.
Ukraine is begging for help from the Europe and the U.S. There has already been an emergency NATO meeting and an emergency U.N. Security Council concerning Russia's movements into Ukraine. I'm sure that was an interesting meeting since Russia is a permanent member of the security council. NATO, the U.N. and President Obama have all strongly condemned Russia's actions but so far it has been nothing but words. Ukraine is home to 45 million people but they only have an army of 130,000. Russia's total military force is about 845,000.
There has been plenty of speculation this weekend on how Russian leader Putin seems ready to reignite the Cold War with the west. Russia's military spending has doubled since 2007 and is on pace to triple by 2016. Russian Defense Minister Sergei Shoigu said the country is currently in talks to set up permanent bases for its navy and bombers in Cuba, Venezuela, Nicaragua, Cyprus, the Seychelles, Vietnam, and Singapore. There were additional headlines of a Russian warship that docked in Cuba this weekend.
Ukraine is not a member of the EU nor is it a member of NATO. It seems unlikely that the West will be willing to get into a shooting war with Russia, especially if all they take is Crimea. However, it's a fluid situation and could change significantly in the days ahead.
U.S. economic data was mixed last week. The market was expecting the Q4 GDP estimate to be revised lower so it was no surprised to see Q4 GDP growth adjusted from +3.2% to +2.4%. The full year 2013 GDP estimate has been adjusted to +1.9%, which is down from +2.8% in 2012. Currently Q1 GDP 2014 estimates are in the +1.0 to +1.2% range.
The Chicago PMI data for February came in at 59.8, up from 59.6. Analysts were expecting a decline. The final reading for the University of Michigan Consumer Sentiment index for February was revised higher from 81.2 to 81.6. Economists were expecting the durable goods orders to drop -1.7% but the number came in at -1.0%. The December durable goods number was revised lower form -4.2% to -5.3%.
There was a lot of data on the housing market. The Case-Shiller 20-city home price index for December rose +13.4%. That's down from November's +13.7% but December marks the tenth month in a row that home prices have risen double digits. Pending home sales for January inched +0.1% following a -5.8% plunge in December. Meanwhile better than expected new home sales data sent the housing stocks surging higher. Analysts were expecting new home sales to fall -3.4% but the January numbers surged +9.6% to an annual pace of 468,000. That's the fastest pace in five years. Mortgage applications were moving the opposite direction with the weekly application index down -8.5%. That follows the prior week's -4.1% decline. The mortgage application purchase index has fallen to the lowest level since 1995.
German retail sales improved +2.5% on a month over month basis. German unemployment was unchanged at 6.8%. The country's Q4 GDP estimate was unchanged at +0.4%. France said their PPI numbers slipped -0.6% for the month, which doesn't help since fears are already rising over deflation in Europe.
Meanwhile in Japan the country said their manufacturing PMI dipped from 56.6 to 55.5. Numbers above 50.0 suggest growth. Japan's industrial production rose +4.0% for the month, which was better than expected. China continues to see housing price appreciation with home prices up +9.6% year over year. A director at the People's Bank of China warned that the economy could be volatile this year. Over the weekend China released their purchasing managers index (PMI) numbers for February, which hit an eight-month low at 50.2. That's down from January's 50.5. Numbers above 50.0 suggest growth and you can see that these PMI numbers indicate China is on the verge of contraction. Last month also saw a very sharp drop in the Chinese currency, the Yuan. There has been some speculation that China is letting their currency fall since it makes their exports cheaper and more competitive.
Investor sentiment on the S&P 500 index was starting to sour by Wednesday after seeing the index fail to breakout to new highs for the third time in a row. Fortunately by Friday's closing bell the index was at a new all-time high. Currently the S&P 500 is up +0.6% for 2014.
If this rally continues then the 1880 and 1900 levels are potential resistance. The 1840 level was support last week but any market decline would probably push the S&P 500 toward its 50-dma near 1820.
chart of the S&P 500 index:
The NASDAQ composite tagged new 14-year highs before paring its gains on Friday. The index is up more than 300 points from its February low. It's probably time for a pullback. Look for overhead resistance at 4400 and 4500 (and the trend line of higher highs). We can watch for likely support near 4200. Year to date the NASDAQ is up +3.2%.
chart of the NASDAQ Composite index:
The small cap Russell 2000 index was a strong performer with a +1.58% gain last week. Year to date the $RUT is up +1.6%. Unfortunately the $RUT also looks very short-term overbought with its big bounce from the February lows near 1080. After a 100-point rally it's probably time for a dip.
The 1200 level and the trend line of higher highs are potential resistance. We can watch for potential support near 1160 and 1140.
chart of the Russell 2000 index
Economic Data & Event Calendar
It's a new month and that means a parade of economic data. On Wednesday we'll see the ADP Employment Change report. Last month the ADP numbers were +175,000 new jobs and estimates for February suggest a similar performance. The nonfarm payroll (jobs) report is due out Friday morning. Last month we saw January job growth of +113,000. Economists are estimating +165,000 for February.
This week we will also hear from the ECB and its latest interest rate decision. No one expects any changes although there are some hoping for a decline in rates to help fight what mean see as Europe's biggest threat - deflation. ECB President Mario Draghi will hold a press conference after the ECB decision is released.
Economic and Event Calendar
- Monday, March 03 -
personal income and spending
ISM (manufacturing) index
auto and truck sales
Eurozone manufacturing PMI data
- Tuesday, March 04 -
- Wednesday, March 05 -
ADP Employment Change Report
ISM Services index
Federal Reserve Beige Book report
Eurozone GDP estimate
- Thursday, March 06 -
Weekly Initial Jobless Claims
European Central Bank (ECB) rate decision
ECB President Mario Draghi press conference
Bank of England (BoE) rate decision
- Friday, March 07 -
U.S. nonfarm payrolls (jobs) report
Additional Events to be aware of:
Mar. 19th - FOMC policy update and economic projections
Mar. 19th - new Fed Chairman Yellen's first press conference
As we look ahead to the first week of March there are a lot of cross currents at play. First and foremost is the situation in Ukraine with Russian troops in Crimea. If shooting starts it could rattle global markets. Right now Ukraine leaders are mobilizing troops and calling up reservists.
Here at home in the U.S. a good chunk of the country is going to get hit with another winter storm. Thus far the 2013/2014 winter has been one of the coldest on record. The U.S. could see up to a foot of snow from parts of Kansas to Massachusetts. This is likely to further fuel the idea that winter weather is depressing Q1 business activity. We'll hear more and more about how Q1 doesn't matter because of the weather but that's because the expectation is a snap back in spring when the weather improves.
Bulls could argue that the trend is up, which is true. I am concerned, at least on a short-term basis, that stocks look a bit overbought with the big bounce from their February lows. Seasonally the market tends to rise in March and into April. The first week of the month should see new mutual fund money put to work. However, market participants may take a wait and see approach. As of Sunday night the futures are down and suggesting a drop at the opening bell on Monday.
It is certainly possible that stocks churn sideways as the world waits to see what happens in Ukraine and waits to see what the U.S. job numbers are on Friday morning.