The stock market endured a tumultuous week of headlines and the most of the major averages still managed to post weekly gains. Q2 earnings announcements generated individual stock volatility. Federal Reserve Chairman Janet Yellen made headlines with her Humphrey-Hawkins testimony. There was a wave of merger and acquisition news. The big stories of the week were the downing of a Malaysian Airliner over Ukraine and the Israeli ground offensive into Gaza. The cascade of negative news late in the week sparked a +22% surge in the volatility "fear" index and the S&P 500 broke its streak of 62 consecutive days without a 1% move. It was the longest streak since 1995.

Investors continue to applaud the parade of M&A news. AbbVie (ABBV) is paying $53 billion to buy Shire Pharmaceuticals (SHPG). The company will move its headquarters overseas to pay less corporate taxes. Whiting Petroleum (WLL) is paying $6 billion to buy Kodiak Oil & Gas (KOG). A long-rumored merger between tobacco giants Reynolds American (RAI) and Lorillard (LO) became a reality. Meanwhile shares of Time Warner (TWX) soared from $71 to $83 after it rejected an $80 per share buyout offer from 21st Century FOX (FOXA).

Economic Data

The U.S. digested plenty of economic news as well. The New York Empire State manufacturing survey improved from 19.3 in June to 25.6 in July. This is the highest reading since 2010. The Philly Fed survey improved from 17.8 to 23.9 and marked the best reading since March 2011. Economists had been expecting a drop to 16. U.S. industrial production only increased +0.2% in June after a +0.5% improvement in May. The wholesales Producer Price Index rose +0.4% in June following a -0.2% drop in May.

Fed Chairman Janet Yellen appeared before congress and the senate for the Fed's semi-annual Humphrey-Hawkins testimony. By law her presentation was identical to each committee so any surprises would likely come from the Q&A sessions afterwards. Yellen helped spark some selling in the biotechs and the social media names when she mentioned these areas as possibly being overvalued.

The monthly U.S. retail sales data rose +0.2% in June following an upwardly revised +0.5% increase in May. The latest University of Michigan consumer sentiment survey declined from 82.5 to 81.3, a new four-month low. Analysts were expecting sentiment to improve to 83.0. Homebuilder sentiment improved with the July reading of the NAHB housing market index rising from 49 to 53, which was better than expected. At the same time housing starts plunged -9.3% in June from 985,000 in May to an annual pace of 893,000. June's drop follows a -2.6% decline in May.

Overseas Data

There were a number of big headlines overseas. Two weeks ago worries over the Portugal banking system sparked some nervousness as market participants pondered the financial health of Espirito Santo International Bank and its parent company ESI. It looks like those worriers were right. A few days ago Espirito Santo International Bank filed for the equivalent of chapter 11 bankruptcy and said it could not make its debt payments. This is not good news for Greece. A banking failure in Portugal turns the spotlight back on struggling southern European countries. There is new speculation that Greece may need another bailout yet again. Meanwhile the central bank of Italy reduced their GDP estimates from +0.7% in 2014 to +0.2%. The Eurozone reported industrial production dropped -1.1% last month.

The Russian stock market has been in rally mode with a +32% surge from its March lows. That changed last week with big losses across the board following the Malaysian Airline disaster in Ukraine and new sanctions from America announced last Wednesday. Believe it or not but Russian President Vladimir Putin's approval ratings actually hit a 6-year high last week (I suspect that poll was taken before the Malaysian airline event).

Japan reported their industrial production rose +0.7% for the month. China said retail sales came in as expected with a +12.4% year over year improvement. Chinese industrial production surged +9.2%, which was better than expected. China's GDP growth came in at +2.0% quarter over quarter, which put its year over year reading right at the official target of +7.5%.

Malaysian Air Flight 17

The market has actually held up pretty well considering Thursday's disaster of Malaysian Airline Flight 17 being shot down over Ukraine, near the Russian border. The jet was flying from Amsterdam to Kuala Lumpur with almost 300 people on board. Currently all of the clues point to pro-Russian rebels as the ones who shot down the plane. That poses a problem for Russia since the rebels used a Russian surface-to-air missile and needed training to be able to use it. Furthermore there is growing evidence that the insurgents were told by a Russian "advisor" to fire on the plane. The equity markets have been calm because the current belief is the event was an accident. The Ukraine separatists probably thought it was a Ukraine An-26 transport plane and not an international passenger jet.

The event is not a mortal blow to President Putin's designs on Ukraine but it has generated a lot of fresh anger around the world at Russia's support for the Ukraine rebels. That anger is only getting worse as the pro-Russian rebels interfere with the investigation and emergency crews trying to work around the crash site.

Israel & Gaza

The situation in Israel has escalated significantly. News of a ground offensive was major headlines on Thursday and Friday. The Palestinian region of Gaza is controlled by Hamas, a terrorist organization that does not support Israel's right to exist. A few weeks ago three Israeli teenagers were kidnapped and later found dead, believe to be the work of Hamas. This appeared to be the spark for the last round of violence.

Hamas has been launching rockets and mortars into Israel for the last three weeks and in just the last ten days alone Hamas had fired more than 1,600 rockets at Israel's cities. Fortunately Israel's Iron Dome anti-missile system has been very effective and shooting down about 85% of the Hamas rockets. Those that have gotten through the defense system have not done that much damage. The Egyptians suggested a ceasefire that Israel accepted but Hamas ignored it and continued to fire rockets. Israel decided enough was enough.

Israel has been using its air force to target launch sites but it wasn't doing enough. Thus the Israeli government called up their reserves and launched a ground offensive on Thursday. Their plan is to target underground tunnels leading into Israel and all the weapon launch sites and storage areas they can find in Gaza. Normally the stock market is immune to headlines regarding decades-long violence between Israel and the Palestinians but this is the first time in years that the Israelis have used a ground offensive with troops in Gaza so it does ratchet up the intensity level.

I found a great online video about the situation in Israel. It's short - less than six minutes long. If you're not familiar with the history it is a great summary on the Jewish-Palestinian conflict.

Video on the Middle East Problem
click here

Major Indices:

As mentioned earlier the S&P 500's drop on Thursday broke its trend of more than 60 days in a row without a 1% move either direction. There was no follow through lower on Friday. Instead traders bought the dip and the S&P 500 closed the week with a +0.5% gain. It's only seven points away from the July 3rd all-time closing high of 1,985 and the index ended the week with a 7.0% year to date gain.

Technically Friday's move is an inside day, which suggest investor indecision. We can argue there is short-term support in the 1950 area and overhead resistance in the 1985 area. I suspect that a breakout past 1985 would signal a run towards the 2,000 mark. I am a bit concerned the 2,000 level could be tough, psychological, round-number resistance. If stocks retreat then a drop below 1950 might signal a correction toward the 1900 level, which should be round-number support.

chart of the S&P 500 index:

Weekly chart of the S&P 500 index

The NASDAQ ended the week with a +0.38% gain thanks to a +1.5% bounce on Friday. This follows a -1.6% loss the prior week. The early July highs near 4457 is a 14-year high. On a short-term basis the NASDAQ might be in a 4350-4450 trading range. I suspect a breakout past 4450 would spark a rally to 4500. Meanwhile a breakdown under 4350 could signal a deeper correction. 4300 and 4200 are likely levels of support. Year to date the NASDAQ is up +6.1%.

chart of the NASDAQ Composite index:

Weekly chart of the NASDAQ Composite index

The small cap Russell 2000 index remains the problem child for the U.S. markets. It has continued to plunge after reversing at resistance near 1210 in early March. However, there is hope. Friday's +1.5% gain has created a bullish engulfing candlestick reversal pattern on the daily chart of the $RUT. This pattern needs to see confirmation. Otherwise the path of least resistance remains lower and the $RUT could be headed for support near 1080. Last week the $RUT posted a -0.7% decline and its year to date loss is -1.1%.

chart of the Russell 2000 index

Economic Data & Event Calendar

The week ahead is a quiet one for economic data. The CPI and the durable goods numbers will be the ones to watch but I doubt either will be market moving.

The biggest events could be geopolitical as the Israeli ground offensive continues.

It will also be a very busy week for corporate earnings, potentially the biggest week for earnings with over 550 companies announcing quarterly results. Thursday alone will have more than 250 companies reporting earnings.

Economic and Event Calendar

- Monday, July 21 -
Chicago Fed survey

- Tuesday, July 22 -
Consumer Price Index (CPI)
Richmond Fed survey
Existing Home Sales data

- Wednesday, July 23 -
HSBC China manufacturing PMI data

- Thursday, July 24 -
Weekly Initial Jobless Claims
New Home Sales data
(Huge day for corporate earnings with over 250 companies announcing)

- Friday, July 25 -
Durable Goods Orders

Additional Events to be aware of:

July 30th - FOMC meeting
Sept. 1st - U.S. market closed for Labor Day

Looking Ahead:

It feels like summer just got here but school starts in just a few weeks. Retailers are gearing up for the back-to-school shopping rush (BTS). The BTS season is the second biggest event for retailers behind Christmas. Some analysts use the BTS spending numbers as a guide for how the Q4 holiday season might pan out. That is not good news this year. recently published an article suggesting consumers remain cautious and likely to spend less this year. The National Retail Federation estimates that the 2014 BTS season could see spending fall to $26.5 billion, which is a little behind last year. The NRF also noted that more shoppers were planning to wait in hopes of catching promotional and discounted deals before school begins. That's not good news for retailer margins.

There have been some interesting and somewhat conflicting numbers on investor sentiment. The most recent Investors Intelligence survey said the stock market's bull/bear ratio was 4-to-1. That's very bullish. Yet a Bloomberg Global Poll noted that 47 percent of investors surveyed felt that stocks were near unsustainable levels and 14 percent felt stocks were already in a bubble. The Investors Intelligence number (4:1) is the highest reading this year and nearing levels not seen since 1987. Contrarians use extreme (bullish) sentiment indicators as a warning signal that stocks could be near a top.

Another sentiment indicator of a different sort is the Merrill Lynch Fund Manager Survey. This survey found that 61 percent of global fund managers were already overweight equities. That is notable because fund managers haven't been that bullish on stocks since February 2011. That was just before the Eurozone financial crisis started heating up. Merrill Lynch went on to speculate that any summer rally would likely be followed by an autumn correction lower.

Here's one more warning to keep in mind. The good folks at the Stock Traders Almanac have pointed out that:

"On average, the year prior to a Fed Funds rate increase has been positive. However, one month after a major shift in policy to tightening, the market has never been up, and averaged a loss of 2.8%. Three months later has been even more negative with an average loss of 4.9%. From six months to one year later, the averages are still negative, but a few modest gains have occurred. Also notable are that the last two times that tightening occurred with DJIA at or near all-time highs (1973 and 1999) the impact was clearly negative."

We already know that the Federal Reserve is planning to end its current QE program in October. Right now analysts are speculating if the Fed will start raising interest rates in the first half or the second half of 2015. Of course the Fed's response would be any decision is "data dependent". The historical data above would suggest that 2015 could be a down year for stocks. Meanwhile the most hated bull market in history continues to climb the wall of worry.

Let's assume for the moment that no one is going to war with Russia any time soon. Let's also assume that in spite of a wave of negative headlines surrounding Israel's foray into Gaza the Israelis will be done in the 10 to 14 days they estimated for the ground offensive and then they pull out. That means the current geopolitical hotspots are unlikely to impact the market's rally. Stocks will be left to move on earnings news alone.

This is a huge week for earnings with over 550 companies reporting. The overall tone of earnings results and guidance could determine market direction for the next few weeks.