The U.S. stock market is struggling to keep its head above water after enduring a flood of earnings reports last week. There are always some high-profile hits and misses. The biggest hit for the week was Apple Inc. (AAPL) who beat estimates by a wide margin and announced a 7-for-1 stock split. Unfortunately AAPL's gains did not do much to support the NASDAQ. Nearly all of the economic data and corporate headlines were overshadowed by rising tensions between Ukraine and Russia. News that Russia was doing military drills off Ukraine's eastern border sparked some selling.

After a six-day bounce that lifted the S&P 500 from 1815 to 1880 the index has already given up 16 points. I warned readers last week that we should not be surprised to see the NASDAQ composite and the Russell 2000 index roll over and retest their April lows. It would appear that roll over has begun. The NASDAQ was down -0.49% and the Russell lost -1.3% for the week. Losses in the Dow Industrials and the S&P 500 were mild, down -0.29% and -0.08% respectively.

Economic Data

Economic data in the U.S. did see some improvement on a broader scale. The durable goods order for March rose +2.6%, which was the best reading in four months. The Richmond Fed survey was strong with a reading of 7 versus expectations for a reading of 2. Numbers above zero suggest growth. The Philly Fed survey also surpassed expectations of 10 with a reading of 16.6. The University of Michigan Consumer Sentiment survey hit its best levels since July 2013 at 84.1, up from a preliminary read of 82.6.

Not everything was coming up roses and the residential real estate industry seems to be slowing down. Existing home sales fell to an annual pace of 4.59 million units. That's the slowest pace since July 2012. New home sales plunged -14.5% month over month to an annual pace of 384,000 homes. Mortgage applications dropped -3.3%. This doesn't bode well for the beginning of the spring selling season.

Overseas Data

Economic data in Europe was mostly bullish. The Eurozone's manufacturing PMI came in better than expected with a rise from 53.0 to 53.3. Germany's manufacturing PMI also beat expectations with an improvement from 53.7 to 54.2. Numbers above 50.0 indicate growth. Germany also said their Ifo business climate survey improved slightly from 110.7 to 111.2. That's a little surprising given the situation with Russia. Meanwhile ECB President Mario Draghi said they were closely monitoring inflation (or in this case deflation) and would launch an asset purchase program, a.k.a. quantitative easing, if the inflation picture worsened.

The situation in Asia is not improving much. Japan said their trade deficit soared. March exports rose +1.8%, down from +9.8% in February, while imports soared +18.1%, up from +9.0%. That boosted their trade deficit from 800 billion yen to 1,446 billion yen. It was the biggest drop in exports since June of 2013.

China is not looking much better. The world's second largest economy does not seem to be responding to regulators stimulus efforts. Their growth remains at the slowest pace in six quarters. The China HSBC PMI data did improve from 48.0 to 48.3, which matched analysts' estimates. While this was the first improvement in four months it was also the fourth monthly reading below 50.0, which suggest economic contraction.

Ukraine-Russian Conflict

Russia wants war. That certainly seems to be the message they are sending. German Chancellor Merkel has publicly said the Geneva peace accord reached just two weeks ago has failed. Merkel called Putin out for not de-escalating the situation. The new Ukraine Prime Minister Arseny Yatseniuk made the alarming statement that Russia is ready to start world war three.

The situation is certainly growing more tense as five Ukrainian separatists (i.e. Russian forces) were killed in clashes with Ukraine security forces this last week. Putin has a planned that worked well in Crimea so why stop now? Odds are he has inserted Russian troops into Ukraine to "help" the locals foster political change and demand vote to secede from Ukraine, just like the vote held in Crimea. These "Ukrainian" rebels have taken over government buildings in several east Ukraine towns, set up road blocks, fired on Ukraine forces, and this last week they took a few international monitors hostage. Putin claims these are not Russian forces just like he claimed the unmarked soldiers in Crimea were not Russian (he later confessed to lying about that).

Putin already has "permission" from the Russian parliament to use military force to protect Russian-speaking peoples in Ukraine if they deem it necessary to save them from the evil Ukrainians. Ukraine has spent the last few weeks calling up its military reserves and promised to meet any Russian incursion across its border as an invasion. Meanwhile there has been a dramatic build up of Russian tanks and helicopters along Ukraine's eastern edge. Russia's military drills on Thursday and Friday helped spooked the equity markets.

Russia has also been harassing other countries by sending Russian military planes into their airspace. The Netherlands and Britain both scrambled fighter jets to chase off Russian planes this past week. Ukraine says Russia violates its airspace on an hourly basis.

Ukraine is not a member of NATO so it is unlikely that the United States or western Europe countries would get into a shooting war with Russia over Ukraine, must to Ukraine's dismay. The Ukraine army is severely outmatched by Russia's. What happens after Russia retakes Ukraine? Will Putin stop there? Former soviet states Estonia, Latvia, and Lithuania are members of NATO but they're probably getting nervous watching this ordeal unfold.

Map of NATO countries:

While the U.S. will (most likely) not get involved in a military war with Russia over Ukraine we could see a financial war. It's possible that the financial war has already begun with Standard & Poor's downgrading Russia's credit rating agency to BBB- last week. That's one grade above junk status and the first time S&P has downgraded Russia since 2008.

Given the developments last week it sounds like the EU and the U.S. are ready to slap even tighter sanctions on Russia this coming week. That's not such a big deal for the U.S. since we only do about $40 billion a year in trade with Russia. It is a much bigger issue for Europe, especially Germany. The EU does about $400 billion a year in trade with the Russian Federation. Meanwhile Russia is preparing counter sanctions. If Russia does invade Ukraine, then the subsequent barrage of financial sanctions could significantly hurt both Russia and European economies. Both economies could suffer a recessionary slowdown that lasts for years. Russia is already feeling the financial pinch as foreign money rushes for the exit. $64 billion in foreign monies have already left Russia since the Ukraine situation began. Russia has had to cancel a bond sale for the 7th time due to lack of buyers.

Major Indices:

The S&P 500's six-day bounce stalled and eventually reversed near the 1885 level. This is now a new lower high following its early April peak at 1897 (essentially 1900). The S&P 500's long-term trend is still higher but it could drop to 1800 and technical support at its 150-dma before threatening its up trend.

The levels to watch are probably support at the mid April lows near 1815 and the 1800 mark. If the 1800 level fails then the 200-dma, currently near 1772, could be the next area of support.

chart of the S&P 500 index:

Weekly chart of the S&P 500 index:

The NASDAQ composite's performance looks a lot more ominous. The bounce rolled over at its new trend of lower highs and technical resistance at its 100-dma. I warned readers last week to expect resistance at the 100-dma. Odds are good we will see the NASDAQ retest possible support near 4000 or its 200-dma near 3965 or even the April intraday low of 3946. A few market pundits are saying the NASDAQ has formed a bearish head-and-shoulders pattern. If it has it's a rather ugly, malformed H&S pattern but it doesn't matter. The overall trend is currently bearish.

The NASDAQ is currently down -2.4% for the year.

chart of the NASDAQ Composite index:

The small cap Russell 2000 index did not have a good week. It's six-day bounce stalled near its 100-dma and shares lost -1.3% for the week. Year to date it's down -3.3%. Odds are good we will see the $RUT retest its April lows either at the 200-dma (near 1,111) or near the 1100 level. The small caps tend to be more volatile than the big caps so I would not be shocked to see the $RUT eventually decline to support near the 1080 area. A close below 1080 would be bearish indeed!

chart of the Russell 2000 index

Economic Data & Event Calendar

It's the beginning of a new month this week so we have a very full plate of economic releases. The ISM data and first look at U.S. Q1 GDP growth rate will make headlines. The big report to watch will be Friday's nonfarm payrolls. Of course even the jobs report could be dwarfed by April 30th's FOMC meeting. Wall Street expects the Fed to reduce QE again. The focus will be on the Fed's outlook.

It is still earnings season. Almost half of the S&P 500 components have reported their Q1 results and more than two thirds have beaten Wall Street's bottom line estimates. We should remember that these are dramatically lowered estimates. Only 55% have beaten the revenue estimates.

Economic and Event Calendar

- Monday, April 28 -
pending home sales for March

- Tuesday, April 29 -
Case-Shiller 20 city home price index
Consumer Confidence
Eurozone confidence survey

- Wednesday, April 30 -
ADP Employment Change Report
FOMC interest rate decision and outlook
Q1 GDP estimate
Chicago PMI data
Bank of Japan rate decision
China manufacturing PMI data

- Thursday, May 01 -
Weekly Initial Jobless Claims
Personal income and spending
ISM index
auto and truck sales
Fed Chairman Yellen speech

- Friday, May 02 -
Nonfarm payrolls (jobs) report for April
Factory orders

Additional Events to be aware of:

May 26 - U.S. market closed for Memorial Day

Looking Ahead:

Sometimes seasonal patterns do not show up. Normally April is one of the most bullish months of the year for stocks. Yet this year it looks like the market will end the month in the red. It could be investors locking in gains ahead of the next seasonal pattern, which is "sell in May and go away". Investors have an added incentive to sell now to avoid what could be a disappointing summer performance ahead of midterm elections.

The Stock Trader's Almanac alerted investors to the sell-in-May phenomenon back in 1986. If you sold on May 1st and didn't jump back into the market until November 1st your gains sprinted past the worst six months of the year. Just trading the best six months of the year by buying and selling the Dow Industrials a $10,000 investment in 1950 would be worth $765,000 today versus a loss of $593 if you only traded the "worst" six months. That same trade in the S&P 500 would be worth $565,846 versus a gain of less than $7,000.

Another troubling sign is the surge in retail investors jumping back into the market. Traditionally when the public decides it's time to start buying stocks it could be signaling a top. Both TD Ameritrade and E*Trade said they saw big jumps in trading volume in the first quarter of 2014. That's not surprising following the market's outstanding performance in 2013. Unfortunately this could be viewed as a contrarian signal that stocks have peaked. Ameritrade reported that the amount of cash their retail clients have as a percentage of total assets dropped to 14.8%. That happens to be the lowest level since September 2007, just before the market crashed.

Last week I mentioned we should keep an eye on the U.S. ten-year bond yields. That remains a potential warning signal for the market. If we see the yield fall below 2.6% or the February low of 2.57% then it could be a significant signal that smart money is moving out of stocks and into the safety of treasuries. Today yields stand at 2.66%.

chart of the U.S. 10-year bond yields

My personal opinion is that we will see the NASDAQ and the Russell 2000 retest their April lows. This will probably drag the S&P 500 toward its long-term trend line of support. There are two wildcards in play. The FOMC meeting and the Fed's comments can always move the markets. The bigger wildcard could be Russia. If Russia invades Ukraine then the markets could see a knee-jerk reaction lower.