Stock market bulls remained in control for the last week of May. It was a four-day week with U.S. markets closed last Monday for Memorial Day. Elections in Europe and Ukraine last weekend failed to spark any concerns for equities. Pro-business "chocolate tycoon" Petro Poroshenko won Ukraine's presidential election. He had previously served as Minister of Foreign Affairs and Minister of Trade and Economic Development.

Here at home the U.S. market has ignored disappointing economic data. The Q1 GDP revision came in worse than expected but the blame it on the weather excuse continues to work. At least the bond market is paying attention. Concerns over the economy continue to fuel a rally in bonds and the yield on the U.S. ten-year note fell to new 2014 lows. The yield hit 2.40% on Thursday. The yield settled at 2.45% on Friday.

Volatility remains nonexistent in the major indices. The VIX closed the week at another new 52-week low and the S&P 500 index spent Friday's session in a narrow seven-point range. We are five months into 2014 and the S&P 500 is hitting new all-time highs with a +4.0% gain for the year. Oil stocks are up +8.25% and the XLE energy ETF is hitting all-time highs. The Dow Transportation Average is up +9.5% in 2014 and hitting new all-time highs. Biotechs are up +11% year to date and the SOX semiconductor index is up +12.0% for 2014.

Economic Data

We had plenty of economic headlines last week. The Chicago PMI data improved from 63.0 in April to 65.5 in May. That was better than expected. The Dallas Fed survey disappointed with a drop below expectations of 9.6 to 8. The Richmond Fed manufacturing survey also disappointed with a decline to 7 versus estimates of 9. Durable goods orders improved +0.8% compared to estimates for a -0.8% pullback. The Case-Shiller 20-city home price index rose +1.2% in March and showed that home prices are up +12.4% from a year ago. Unfortunately pending home sales plunged from +3.4% in March to +0.4% in April.

Confidence seems to be fading. The University of Michigan Consumer Confidence survey dropped from 84.1 in April to 81.9 in May. The present conditions component hit its lowest levels since November with a drop to 94.5. The expectations component also slipped. Corporate confidence continues to slip as well with the Bloomberg Orange Book CEO confidence survey falling to a 52-week low.

Thursday unveiled the newest Q1 GDP estimate, which was revised lower from a +0.1% gain to -0.98%. It marks the first contraction in the U.S. economy since a -1.3% drop in Q1 2011. The Q1 2014 decline follows the +2.6% gain in Q4 2013. Nearly all of the GDP decline was due to weak inventory data. The stock market ignored the news and blamed it on the extraordinarily cold Q1 winter weather. Many analysts believe the U.S. will see a huge snap back in business activity in the second quarter with some estimates suggesting +4% growth. Unfortunately we're not seeing that happen yet. Personal spending in April declined -0.1% compared to estimates for +0.2% growth. This certainly does not support the "pent-up demand" theory for Q2 growth.

Overseas Data

Germany said their retail sales declined -0.9% for the month, which was worse than expected. German unemployment held steady at 6.7%. French consumer spending also declined with a -0.3% drop for the month. Meanwhile Eurozone consumer confidence inched higher from -8.6 to -7.0.

In Asia most of the headlines came from Japan. April retail sales in Japan plunged -4.4% year over year. That was worse than expected and the worst decline since 2011. This is likely a reflection on Japan's consumption tax, which started April 1st. Consumers rushed to make their purchases before the tax began and pulled business forward into March. Japan also said their household spending dropped -4.6% year over year.

Major Indices:

Big cap stocks continue to lead the rally and the S&P 500 added +1.2% for the week and closed at new all-time highs. The index added +2.1% in May and broke through resistance at the 1900 level.

You can see on the daily chart below that the S&P 500 index is nearing previous resistance at its trend of higher highs. We could see the index tag this trend line and then pullback to 1900, which should be new support. Below that there should be additional support at its 50-dma near 1880. If the S&P 500 rally pushes through the trend line of resistance then the 1940-1950 area is the next likely area to find resistance.

chart of the S&P 500 index:

Weekly chart of the S&P 500 index:

The NASDAQ composite delivered a +1.3% gain for the week and a +3% gain for the month of May. The recent breakout from its consolidation phase is encouraging but it might be time for a pullback. The 4150-4200 area might offer some support.

If this rally continues unabated then the next levels to watch are potential resistance at 4300 and the 2014 highs near 4371.

chart of the NASDAQ Composite index:

Weekly chart of the NASDAQ Composite index:

The small cap Russell 2000 chart is probably the most troubling this week. The $RUT gained +0.74% for the week and is up +0.8% for the month of May. This reduced its year to date loss to -2.5%.

The current bounce has broken through some resistance levels. However, the rally has stalled these past three days near 1140 and its 50-dma and 150-dma.

If the $RUT sees a pullback there might be short-term support around 1120 and its 200-dma. Otherwise the closest support is around 1180.

chart of the Russell 2000 index

Weekly chart of the Russell 2000 index

Economic Data & Event Calendar

It is the beginning of a new month. That means lots of economic data. Economists are hoping for small improvements in both the manufacturing ISM and the services ISM. The biggest report in the U.S. will be Friday's nonfarm payrolls (jobs) report. Analysts are estimating +215,000 new jobs in May, down from +288,000 in April. If this number is too weak it will damage the argument that the U.S. will see a big snap back rebound in Q2 economic activity.

One of the most important events this week will be the ECB meeting on Thursday. ECB President Mario Draghi has all but promised some form of stimulus for the EU. Unfortunately they can't enact the same sort of QE program that the U.S. Federal Reserve has done. Draghi will have to come up with some other unconventional form of stimulus as the ECB tries to fight off the specter of deflation.

It's also worth noting that on Sunday we'll see the HSBC China PMI data. This has been stuck in contraction territory for the last few months.

Economic and Event Calendar

- Monday, June 02 -
ISM Index for May
Construction spending
Eurozone PMI data

- Tuesday, June 03 -
Factory Orders
Auto & Truck sales for May

- Wednesday, June 04 -
ADP Employment Change report
Eurozone Services PMI data
ISM Services Index
Federal Reserve's Beige Book report

- Thursday, June 05 -
Weekly Initial Jobless Claims
Bank of England interest rate decision
European Central Bank (ECB) interest rate decision
ECB President Mario Draghi press conference

- Friday, June 06 -
Nonfarm (jobs) payroll report for May
Unemployment rate

Looking Ahead:

Thus far the stock market bulls have proven themselves quite the climbers. Every time another problem gets added to the market's wall of worry the bulls manage to scale it. Terrible Q1 U.S. growth? No problem. QE slowing down and higher rates on the horizon? No Problem. A belligerent Russia that basically invaded and annexed part of Europe? No problem. An economic slowdown in China? No problem. A slowing U.S. housing market? No problem.

This bullet proof stock market has not stopped the bears from shooting at it. This past week there has been a lot of chatter about how today's market eerily resembles the stock market of May 2007. Back in May 2007 we faced similar issues with big cap strength masking broader market weakness. May 2007 also had very low volatility and a struggling housing sector. Of course it's also worth noting that the stock market continued to rally for another five months and didn't peak until October 2007.

Speaking of market tops, an analyst at Bank of America Merrill Lynch is predicting that stocks will continue to drift higher this summer and then see a -15% to -20% correction before the year is over. Merrill Lynch's Hedge Fund Monitor said big investors have actually gone net short on the S&P 500. Short positions on the Russell 2000 are at two-year highs and bullish bets on the NASDAQ are at one-year lows. Either smart money is betting big on a market correction or they're going to get squeezed out of these bearish bets and thus add more fuel to the bull market's fire.

There is also a concern among market pundits that the ECB's move to announce some sort of economic stimulus has been so telegraphed that it's already baked into the market. Instead of seeing a rally on the ECB announcement we could actually see a sell the news event.

I do have some positive news on the Russian front. The U.S. says Russia has pulled back the majority of their armed forces from the Ukraine border. Russia still has several thousand troops stationed on the border but it would appear that Russian President Putin has cooled his aggressive stance and will take a wait and see approach. Ukraine is still experiencing fighting between pro-Russian rebels and government forces. There's no guarantee this will fade away just yet.

Technically nothing has changed for us. The S&P 500 is still overdue for a correction. We are in the middle of the worst six months of the year. Trading volumes will slowly dry up over summer, which could exacerbate any market moves. Volatility remains unusually, dangerously low and signaling a potential market top soon. Yet none of this means that equities can't continue to march higher for months to come. We just can't be surprised when the correction eventually shows up.