The first full week of August 2014 was a busy one with the market digesting a lot of headlines. If you recall the prior week (last week of July) was the stock market's worst weekly drop in two years. There was a growing sense of fear that Russia was preparing to invade Ukraine (again). The last week of July apparently spooked retail investors with U.S. stock funds seeing their worst weekly outflows in six months.

Last week was not a good one for mergers and acquisitions. Two high profile deals fell apart. 21st Century Fox (FOXA) abandoned its attempt to buy Time Warner (TWX). Meanwhile Sprint (S), which is a subsidiary of Japan's SoftBank Corp., gave up its attempted acquisition of T-Mobile (TMUS). In non-market news the World Health Organization (WHO) declared the Ebola outbreak in Africa an international health emergency. WHO director general Dr. Margaret Chan said this is the worst Ebola outbreak since the disease was discovered 40 years ago. It could take months to try and contain it. The virus can incubate inside a person for 21 days so it's hard to detect. Almost 1,000 people have died this year and Guinea has closed its borders with Sierra Leone and Liberia in an attempt to stop further infection across its borders.

The biggest market moving news came from the Ukraine-Russian conflict. After days of mounting concern that Russia was building up troops on the Ukraine border to invade suddenly fears eased thanks to a single tweet. A Russian news agency tweeted on their Twitter account that Russia's military exercises on the Ukraine border were over and they would be sending troops back to their bases. Whether you believe this bit of news or not is a good question but the market accepted it and stocks rebounded sharply on Friday. Skeptics are still concerned that Russia could send troops into Ukraine on a "peace keeping" mission as an excuse.

Headlines that the U.S. has started bombing Islamic State terrorists (a.k.a. ISIS) currently operating in Iraq was also seen a bullish sign. ISIS insurgents had been active this past week. They captured Iraq's biggest dam near Mosul. Now they control the water and power for millions of Iraqis. If they choose to destroy it the flood would create a 65-foot wave that would wash over Mosul, just 31 miles away. Even Baghdad, 200 miles downstream, would see severe flooding. Part of the problem is the dam itself. It's poorly constructed and just failing to maintain it properly could cause a failure. This puts an estimated 500,000 Iraqis at risk.

ISIS also captured a couple of Kurdish towns to the north. They have threatened many with the ultimatum of converting to Sunni Islam or die. Between 40,000 and 50,000 Christian refugees have fled to a northern Iraq mountain to avoid ISIS. These refugees were slowly starving to death before the U.S. and U.K. airdropped supplies. There have also been a flood of stories of ISIS beheading Christian children, shooting scores of men in the dessert execution style, and generally terrorizing anyone not of their religious sect. A lot of the evidence comes from ISIS themselves as they publish photos and videos on online and social media.

The U.S. does not want to reengage in a Iraq war and there is no stomach to put "boots on the ground" in Iraq again. ISIS leaders are calling out the American government for cowardly dropping bombs and not sending in soldiers to fight. The terrorists have also threatened to raise their flag over the White House. The really scary issue is the unsecure border between U.S. and Mexico. Border patrol agents only capture a fraction of those crossing illegally into the U.S. and they've found people from almost every country on earth crossing into the country. There is tons of evidence of Muslims crossing into the U.S. through our southern border. We don't know if they're trying to reach the U.S. in search of a better life or if they're here to perform terrorist activities.

All of this geopolitical uncertainty combined with disappointing economic data out of Europe helped push stocks lower through Thursday. According to Bloomberg, by Thursday night, almost 80 percent of the S&P 500 index was trading below their simple 50-dma. Rising risk and falling stocks helped push money into safe haven trades like U.S. bonds. Bonds have been rising with their fourth gain in the last five weeks. Yields on the 10-year note fell to 2.37% on Friday morning, a new 12-month low, before bouncing back to 2.41%.

Weekly chart of the U.S. 10-year bond yield

Economic Data

Most of the economic data in the U.S. was positive last week. The ISM services (non-manufacturing) index rose from 56.0 in June to 58.7 in July. That was better than expected and the highest reading since early 2008. Factory orders were also better than expected with an increase from a -0.6% drop in May to a +1.1% gain in June. Durable orders also improved with a +1.7% gain in June following a -0.9% drop in May. The weekly initial jobless claims hit eight and a half year lows at 289,000. Plus the four-week moving average on jobless claims hit its lowest level since 2006.

Overseas Economic Data

Unfortunately it was a different story in Europe. There was some positive news with a 5 billion euro bailout for the failing Portuguese Banco Espirito Santo. This news was overshadowed by a slowdown in Italy and Germany. Italy reported a Q2 GDP growth of -0.2%. This pushes the country back into recession. Actually this is Italy's third recession in the last several years and Italy has erased all of its growth since the year 2000.

Germany announced that their factory orders fell two months in a row with the latest reading down -3.2%. Germany also said their trade surplus fell worse than expected from 18.8 billion euros to 16.2 billion. The German DAX stock index is down -10% from its early July highs. Germany is the Eurozone's biggest and strongest economy so if Germany is slowing down that doesn't bode well for the rest of the continent.

European Central Bank President Mario Draghi borrowed a phrase from the U.S. Federal Reserve and said the ECB would keep rates low for an "extended period". Mario noted that the Eurozone's recovery is weak, fragile, and very uneven. Mr. Draghi told reporters, "Heightened geopolitical risks, as well as developments in emerging-market economies and global financial markets, may have the potential to affect economic conditions negatively."

Market analysts remain worried about a slowdown in China but the latest report on Chinese exports was positive. China said their exports soared +14.5% in July. That's the biggest jump since April 2013. Economists were only expecting Chinese exports to increase +7.5%. According to Beijing their trade surplus hit a record $47.3 billion, up from $31.6 billion. This is encouraging news for the global economy and might overshadow the weakness in Europe.

Major Indices:

The S&P 500 index flirted with a breakdown below technical support at its 100-dma and the 1900 level. Fortunately investors were in a buy-the-dip mood following the Russian headlines above. The low on Thursday was about 1905. It was also a dip to the bottom of the S&P 500's bullish channel on the weekly chart (shown below).

If you believe the trend is your friend then this bounce from support on the S&P 500 could be a new bullish entry point. I cautioned readers last weekend that I expected a bounce from 1900 and the real question is whether or not the rebound sees any follow through higher.

On a short-term basis the 1950 area and the 50-dma are overhead resistance. The 1900 area remains the support level to watch. Last week's +0.33% bounce in the S&P 500 bumped its year-to-date gain to +4.5%.

chart of the S&P 500 index:

Weekly chart of the S&P 500 index

The NASDAQ composite spent most of the week churning sideways in the 4320-4390 zone. If you look at an intraday chart you'll see the short-term trend of lower highs, which is technically bearish. Lack of follow through on the prior week's drop is encouraging but that doesn't mean I'm bullish on the NASDAQ. A dip to support near 4200 would look like a better entry point. If the NASDAQ can rally past resistance near 4400 then it will likely shoot back toward its recent highs in the 4485 range.

chart of the NASDAQ Composite index:

Weekly chart of the NASDAQ Composite index

After a four-week drop the small cap Russell 2000 index ($RUT) managed a bounce. It rebounded +1.48% and that reduces its 2014 loss to -2.7%. Unfortunately I don't trust this bounce in the $RUT. The last few days looks like a bear-flag consolidation pattern. The 1140 mark and the 200-dma near 1145 are probably short-term resistance. The support levels to watch are still 1100 and 1080.

chart of the Russell 2000 index

Weekly chart of the Russell 2000 index

Economic Data & Event Calendar

Most of the economic data this week will be overseas. We still have a few late-season Q2 earnings reports as well.

Economic and Event Calendar

- Monday, August 11 -
Japan's industrial production data

- Tuesday, August 12 -
Japan GDP estimate
Germany's ZEW survey

- Wednesday, August 13 -
U.S. Retail Sales data for July
Business inventory data for June
China's retail sales data
Eurozone's industrial production

- Thursday, August 14 -
Weekly Initial Jobless Claims
Eurozone GDP estimate

- Friday, August 15 -
Producer Price Index (PPI) for July
New York Empire State manufacturing survey
Industrial production & Capacity Utilization
University of Michigan Consumer Sentiment survey

Additional Events to be aware of:

Aug. 28th - 2nd estimate on U.S. Q2 GDP growth
Sept. 1st - U.S. market closed for Labor Day

Looking Ahead:

Looking ahead the trading picture looks a little bit better than last week. The S&P 500 index is bouncing from support near 1900 and the bottom of its bullish channel. The Dow Industrials are bouncing from technical support at its simple 200-dma. Investors are cautious. The latest AAII trading poll saw bearish sentiment spike to the highest level in a year. A healthy dose of caution is probably good news for the bull market.

Goldman Sachs put out a note that said the market's biggest concerns are geopolitical risks, China, and interest rates. Essentially Goldman is saying the situation in Ukraine and Iraq are wildcards. As long as they don't escalate out of control then they will likely have little impact on the stock market. China remains pivotal to the global economy and the situation there seems to be improving. Meanwhile interest rates, the constant focus for market watchers, will be the catalyst that could influence stocks the most either direction. We already know that analysts are keenly focused on when the Federal Reserve will start raising rates in 2015.

Overall the market's trend is still higher with the exception of the Russell 2000. That doesn't mean it's easily sailing ahead. Actually the next couple of months could see rough waves. Seasonally August and September are not a great environment for the stock market. We have a midterm election coming up in the U.S. While the situation in Ukraine looks like it might cool off the situation in Iraq is heating up.

I suspect the market will see an elevated level of volatility for the next few weeks.