Stocks were up four out of five days last week. The only hiccup was thanks to Federal Reserve President Charless Plosser on Tuesday. Plosser suggested the Fed might need to taper faster and raise rates more quickly than expected. This sparked some selling last Tuesday but traders quickly bought the dip. The FOMC minutes from the last meeting proved to be a nonevent. News of another coup in Thailand failed to rattle the markets. Then again that's probably no surprise. This is the 19th military coup in Thailand in the last 80 years (including this one, only 12 coup attempts have been successful).

Big cap stocks continue to lead the market higher. The S&P 500 index closed above the 1,900 mark for the first time in history. The NASDAQ appears to have broken out from its recent consolidation and the small cap Russell 2000 has rallied back above technical resistance at its simple 200-dma. The Dow Jones Transportation Average is hitting new all-time highs. Last week's rally got a boost from gains in the semiconductor and biotech industries. Both the chips and the biotechs are up more than +9% for the year. The transports are up +7.9% in 2014.

Economic Data

We did not have a lot of economic data last week to move the markets. What we did see was focused on the real estate market. Existing home sales rose +1.3% to an annual pace of 4.65 million units in April. This snapped a three-month decline. New home sales in April rose +6.4% to an annual pace of 433,000. This followed March, which was revised higher from 384K to 407K. While the pace of new home sales increased April remained a slow month for sales. The price of new homes actually declined -1.3%.

Overseas Data

There was plenty of data out of Europe last week. Yet European markets were quiet ahead of the EU parliamentary elections this past weekend. The Eurozone said their manufacturing PMI declined from 53.4 to 52.5. This was worse than expected. The United Kingdom said its GDP rose +0.8% quarter over quarter and retail sales improved +1.3% for the month.

France said their manufacturing PMI fell from 51.2 into contraction territory at 49.3. Germany reported +0.8% growth for its quarterly GDP. Germany's manufacturing PMI dropped from 54.1 to 52.9. The German Ifo Business Climate index slipped from 111.2 to 110.4. PMI numbers below 50.0 suggest economic contraction.

China's HSBC Flash Manufacturing PMI number hit a five-month high at 49.7 in May. This reading was better than expected but it's also the fifth month in a row it's been under 50.0. That does not help relieve any worries about a slowing Chinese economy.

Japan said their manufacturing PMI inched up from 49.4 to 49.9, marking its second month in a row below the key 50.0 level. Japan's trade deficit improved significantly thanks to a +5.1% jump in exports. The country's core machinery orders gauge sprinted +19.1%, significantly higher than expected. The Bank of Japan announced no changes to its monetary policy as they believe their economy continues to improve at a moderate pace.

Major Indices:

The large cap S&P 500 index bounced off its 50-dma and rallied to new highs with a +1.2% gain for the week. Its 2014 gain is at +2.8%. It's nice to see a new high but closing at 1,900.53 does not qualify as a "breakout". Technically shares are merely testing round-number, psychological resistance at the 1900 level. There is no denying that the trend is higher. Further gains could definitely help fuel some short covering.

If I had to guess the 1920-1925 area could be overhead resistance. Should this rally fail then we can watch for short-term support in the 1860-1880 zone and the 1840 level.

chart of the S&P 500 index:

Weekly chart of the S&P 500 index:

The action in the NASDAQ composite last week was definitely encouraging. The index has been consolidating sideways the last few weeks. Suddenly this tech-heavy index appears to be in breakout mode with a rally through its 50-dma and the 100-dma. Technically this is bullish. Last week's +2.3% gain has lifted the NASDAQ back into positive territory for 2014 with a +0.2% advance for the year.

chart of the NASDAQ Composite index:

Weekly chart of the NASDAQ Composite index:

The small cap Russell 2000 index has been underperforming its big cap rivals for the last three months. The action last week is hinting that it may have found a bottom, just maybe. The rally through technical resistance at its 30-dma and 200-dma is bullish. The next resistance levels to watch are probably 1140, its 150-dma, and the 50-dma. There are a lot of small cap shorts right now so further gains could spark some serious short covering.

Last week's +2.1% bounce in the $RUT has pared its year to date loss to -3.2%.

chart of the Russell 2000 index

Weekly chart of the Russell 2000 index

Economic Data & Event Calendar

Economic reports to watch this week are probably the durable goods number, the Q1 GDP estimate, and the Chicago PMI. Economists expect the durable goods orders to fall from +2.6% in March to -1.4% in April. The Q1 number is the second estimate on growth in the United States. The first estimate was almost negative at +0.1%. The consensus estimate is revision higher to +1.3% but Moody's is expecting a drop to -0.8%.

Markets will be watching ECB President Draghi in case he says anything about policy. Right now there is a growing expectation the ECB will announce some sort of stimulus program at their June meeting.

Economic and Event Calendar

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

- Tuesday, May 27 -
Consumer Confidence survey
Durable Goods Orders
Case-Shiller 20-city home price index
ECB President Mario Draghi will speak

- Wednesday, May 28 -
Eurozone Unemployment

- Thursday, May 29 -
Weekly Initial Jobless Claims
Q1 U.S. GDP estimate
Pending home sales for April

- Friday, May 30 -
Personal income and spending
Chicago PMI

Additional Events to be aware of:

Looking Ahead:

The continued strength in the big cap indices like the S&P 500 and the Dow Industrials is encouraging. Last week's participation in the rally by the NASDAQ and the Russell 2000 are also positive signs. However, the combination of the S&P 500 index hitting resistance and new highs at the 1900 level at the same time we see the volatility index (the VIX) falling to new 52-week lows and on the extremely low volume is a major warning signal for the bulls.

The VIX has been plunging, down four weeks in a row and at new one-year lows at 11.43. The March 2013 low was 11.05. Back in late 2006 and early 2007 the vix hovered around 10.0. These extremely low reading suggest significant investor complacency and normally accompany market tops.

There is no guarantee that stocks will reverse tomorrow but it seems like the perfect recipe to see the S&P 500 tag a new high at 1900 and the VIX at new low just as we move into summer, a traditionally weak period for equities.

chart of the Volatility Index

Looking ahead we could see the Ukraine-Russian conflict return to the headlines. Ukraine just held presidential elections over the weekend. It looks like pro-west businessman Petro Poroshenko has won the election. Russia claims they're willing to cooperate with the new Ukraine leadership. Poroshenko promises to stop the "war" in the eastern half of his country. He will have his hands full. New fighting broke out between Ukraine forces and pro-Russian rebels in the last couple of days. If it looks like Ukraine can soothe its eastern half and Russia doesn't invade then geopolitical risks to the stock market will fade. That's assuming the rising tensions in the East with China versus Japan and China versus Vietnam don't worsen.

We still want to keep an eye on the bond market. Bonds slowly pulled back last week but it could be just a rest before they rally to new 2014 highs. If the yield on the 10-year U.S. bond drops below 2.5% again it will be considered bearish for the stock market.

Big picture it's a tough time to be a raging stock market bull. China's growth is still slowing down and hitting its slowest pace in a decade. All of Europe's recent growth has faded and much of the area is on the verge of recession. The back and forth sanctions between Europe and Russia will also be another encumbering factor that slows business activity. Growth in the U.S. slowed significantly in the first quarter at +0.1% and almost negative territory. A lot of folks are expecting a big snapback rebound in Q2 growth now that the weather has improved but if it doesn't show up it's going to hurt investor sentiment. Meanwhile there is some hope in areas like India with the recent election and the new business-friendly Indian prime minister promising much needed reforms.

We cannot ignore the market's strength. There are opportunities for investors. I merely suggest caution. The summer before mid-term elections tend to be volatile. As much as I like the rebound in stocks we saw last week I'm worried we're due for a pullback. The S&P 500 index has gone 964 days without a -10% correction and 1,277 days without a -20% pullback. We are way, way overdue but that doesn't mean the market can't keep pushing higher.