The U.S. stock market rebounded almost all of last week on hopes that Putin was telling the truth about his plans to deescalate the situation in Ukraine. This allowed stocks to ignore a week of negative economic data, especially out of Europe. Yet by Friday the focus had returned to Russia. All week long there was suspicion over Russia's convoy of humanitarian aid to Ukraine. Suddenly the situation worsened on Friday when Ukraine reported they had destroyed a number of Russian armored personnel carriers trying to sneak into the country just ahead of the humanitarian convoy. Where the market goes next could depend on geopolitical headlines over the weekend.

In other news there is a ceasefire in Gaza between Hamas and Israel while diplomats try and hammer out another agreement. It's somewhat surprising the current ceasefire has lasted as long as it has. Nearby the situation in Iraq remains troubling. The EU and the U.K. are supplying weapons to the Kurds to help protect themselves from the Islamic State terrorists. While there has been some success rescuing the Yazidi religious minority in Iraq this past weekend brought new headlines of ISIS terrorists massacring dozens Yazidi men. The terrorists attacked a village saying convert or die. Those that refused were shot and the village women and children were kidnapped, likely to be forced into marriages to foreign ISIS terrorists.

The combination of geopolitical headlines and distressing economic data has been driving money into safe haven investments like U.S. bonds and German bonds. U.S. bonds rallied to new 13-month highs driving 10-year yields toward 2.3%. The yield settled at 2.34% on Friday. Meanwhile money poured into German bonds and the yield on the 10-year German bond closed at 0.95%. If investors are worried enough to put their money into low-yielding bonds then why are stocks rising as well?

The large cap S&P 500 index bounced +1.2% last week and boosted its year to date gains to +5.7%. The NASDAQ composite outperformed with a +2.1% bounce. The small cap Russell 2000 index only managed a +0.9% gain and is still down -1.9% for the year. Transports were strong with a +2.1% bounce last week. Semiconductors were stronger with a +3.0% gain. Biotechs were the leaders with a +4.5% surge higher last week. Year to date the biotechs are up +24.9%.

Economic Data

The U.S. government said retail sales in July were flat following a +0.2% increase in June. That's disappointing considering that consumer spending accounts for almost 70% of the U.S. economy. The biggest retailer on the planet, Wal-mart (WMT), reinforced this news with a disappointing earnings report. WMT said their customers are struggling both here in the U.S. and abroad. WMT reported flat same-store sales growth. The company's sales growth has been relatively flat for virtually six quarters in a row. WMT lowered its 2015 guidance.

The New York Empire State manufacturing survey was another disappointment. The survey plunged from July's 25.6 to 14.7in August. The Producer Price Index (PPI) inched up +0.1% in July following a +0.4% jump in June. U.S. industrial production did improve from +0.2% in June to +0.4% in July. While that is slow we're definitely outpacing industrial production in Europe.

Yet another disappointment was the University of Michigan Consumer Sentiment Survey. The headline number retreated from 81.8 in July to 79.2 in August. That's the lowest reading since November. Economists were expecting a rise to 82.5.

Overseas Economic Data

Economic headlines out of Europe were terrible. The 18-member Eurozone said their Q2 GDP growth was flat as in zero growth. This was below expectations for growth of +0.1%. Germany, France, and Italy all weighed on the region. You may have heard that Italy's Q2 GDP growth has turned negative again and the country is in its third recession since 2008. France is the second biggest economy in the EU and they reported +0.0% Q2 GDP growth. That's the second quarter in a row that French growth has been flat.

The big shocker last week was Germany. Germany is the EU's biggest and strong economy. At least it used to be the strongest. Germany reported Q2 GDP growth, actually a decline of -0.2%. That's down from +0.7% in Q1. This is the first time Germany has seen negative growth in over a year. Germany has been Europe's growth engine. If Germany has turned negative what does that say for where the region is headed? According to Britain's Telegraph, "Zero or negative growth, combined with very low or negative inflation, means that debt burdens will start to shoot up as a share of GDP and that bank balance sheets will begin to take losses again. The European Central Bank is failing to perform the impossible task that it has been set: it is meant to set the right monetary policy for an extraordinarily heterogeneous set of economies."

There is a growing expectation that the European Central Bank (ECB) will be forced to do something to save the region from another financial crisis. Unfortunately this time Europe is suffering the side effects of the Russian sanctions. While the sanctions are designed to hurt Russia they also impede business and growth in Europe, which is why the EU was so slow to initially launch any meaningful sanctions.

In other news the Eurozone said their industrial production fell -0.3% for the month. The Eurozone ZEW economic sentiment poll collapsed from 48.1 to 23.7, which was way below expectations.

The news feed was not any brighter in Asia. Japan reported a terrible Q2 growth number. Japan's economy sank at an annualized pace of -6.8% in the second quarter. For the quarter Japan's GDP fell -1.7% marking its worst drop since 2011. The big drop follows Japan's increase on sales tax in April. The government said they might raise the sales tax again from 8% to 10% if they need to raise money. They need to do something since the country's debt has risen past one-quadrillion yen.

It's widely believed that the major economic reports out of China are massaged by the government to appear healthier than they really are. If that's true then the economy must be slowing down a lot worse than anyone expects. This past week the latest data on power consumption in China does not paint a pretty picture. The Jiangsu and Shanghai provinces saw power consumption drop -10% in July versus double-digit increases a year ago. Several provinces reported a drop in power consumption of more than -20%. Why is this important? Since we believe the Chinese government manipulates the official GDP numbers economists have taken to looking at power consumption as another way of gauging China's economic activity. Big declines in power usage do not bode well for the country's GDP growth.

Ukraine-Russian Conflict

Let's talk briefly about the situation on the eastern Ukraine border. One week ago Russian President Putin offered what sounded like conciliatory remarks about stopping the bloodshed and conflict in Ukraine. He announced Russia would send a convoy of humanitarian supplies to help out. This helped spark the bounce in U.S. stocks. All week long there was debate over the purpose of this convoy. Was it a Trojan horse meant to infiltrate Ukraine? The Ukraine government promised to block the convoy unless it was inspected first.

Putin was speaking from the recently invaded and annexed Crimea this past Friday. His public remarks called for a peaceful resolution to the crisis in Ukraine. Yet at the same time there are eye witness accounts of Russian armored vehicles crossing the border into Ukraine. The Ukraine government said they destroyed these Russian military vehicles. Putin denies any Russian vehicles were in the area. So who is telling the truth? There were two British journalists with the humanitarian convoy of supply trucks. They reported their eye witness accounts of seeing Russian military vehicles cross into Ukraine ahead of the convoy. Why would Putin let these reporters see that crossing take place and then deny it when Ukraine says they destroyed the invading vehicles?

It might be disinformation but some reports suggested these Russian military vehicles did not have any plates to identify them as Russian. Another story suggests they were actually Ukraine vehicles destroyed by Ukraine to make it look like an attack on Russian troops.

There are plenty of opinions on Russian President Putin. Does he really know what he's doing? Depending on who you ask, he is three steps ahead of his rivals or he is just making it up on the spot. It feels like a chess game as Putin thumbs his nose at the West. One has to wonder if Putin is a fan of Frank Herbet's Dune book or at least the concept of "the slow blade penetrates the shield." Russia has been training and arming the Ukraine rebels for months. Russian vehicles have been crossing back and forth across the border the entire time. Why would he stop now? One could argue we're seeing the Russian invasion in slow motion. Maybe the plan is to slowly desensitize the global audience before moving in for the kill. Or maybe he plans to just swallow Ukraine one small chunk at a time.

One thing to consider is the calendar. Summer is going to be over soon. If you're a Game of Thrones fan then you know what the Starks say, "Winter is coming." Russia could play hardball and start using their energy exports as economic weapons by raising prices or cutting off supplies. Europe might be more agreeable if it's a cold winter and they need Russian natural gas to heat their homes. Granted that is a two-edged sword since Russia needs the money from its energy exports. That doesn't mean Putin wouldn't do it.

Major Indices:

The S&P 500's rebound from support near 1900 and the bottom of its bullish channel has stalled. The rally is testing resistance near 1960 and its converging moving averages. The main averages appear to be the 30-dma and 50-dma. If this bounce fails then we're headed right back toward 1900. Should this rally continue then likely resistance is 1985 and the 2000 mark.

If the S&P 500 breaks down below 1900 it would be a blow for investor sentiment on top of breaking its two-year trend of higher lows.

chart of the S&P 500 index:

Weekly chart of the S&P 500 index

Strength in technology, semiconductor, and biotech stocks helped boost the NASDAQ last week. The composite index is testing resistance at its 2014 highs. A breakout could really boost investor attitudes but the 4500 level could be challenging resistance to crack.

If this index reverses I would keep an eye on the 4200 level and its simple 200-dma.

chart of the NASDAQ Composite index:

Weekly chart of the NASDAQ Composite index

The small cap Russell 2000 index continues to underperform the large cap indices. Last week's rebound attempt struggled with resistance in the 1150 area and the simple 100-dma, 150-dma, and 200-dma. There is additional resistance near 1160 and its 50-dma.

Potential support levels to watch remain 1100 and 1080.

chart of the Russell 2000 index

Weekly chart of the Russell 2000 index

Economic Data & Event Calendar

This week we're going to get an update on the U.S. residential real estate market with multiple reports on the industry. The market will also be interested in the FOMC minutes. Friday investors will be tuned in to hear Federal Reserve Chairman Janet Yellen speak from the Fed's annual conference in Wyoming. She'll be speaking on the labor market with a speech titled, "Re-Evaluating Labor Market Dynamics".

Economic and Event Calendar

- Monday, August 18 -
NAHB housing market index

- Tuesday, August 19 -
Consumer Price Index (CPI)
Housing Starts & Building Permits

- Wednesday, August 20 -
China manufacturing PMI data
FOMC Minutes

- Thursday, August 21 -
Weekly Initial Jobless Claims
Eurozone PMI data
Existing home sales
Philadelphia Federal Reserve survey
Federal Reserve Annual Jackson Hole conference

- Friday, August 22 -
Fed Chairman Yellen's keynote address

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:

As we look ahead I'm concerned the market will be held hostage to any new developments between Russia and Ukraine. If the headlines from this conflict stall then stocks could be allowed to rally. Earnings last quarter were better than expected. The U.S. economy seems to be holding up in spite of some very disappointing headlines and numbers coming out of the retail industry.

We need to be keenly aware that Europe is slowing down quickly. One analyst suggested that stock market strength is a bet that central banks will do whatever they can to prop up their economies with more stimulus. That could be Europe, China even the U.S. if growth slows again. The challenge is that central banks have a hard enough time trying to steer the economy if we add geopolitical headlines on top of problem the central bankers may be unable to help.

The markets struggled during the European financial crisis back in 2009. Unfortunately Europe never really solved this problem. They slapped a bunch of band aids and temporary patches on the issue and kicked the can down the road. Now it's five years later and the European financial system is still fragile. This time is different with a slowing German economy and Russian sanctions to encumber the region. Any more financial shocks could shake investor sentiment. This is more of a big picture issue and not one likely to affect us in the week ahead.

Technically I will remind investors that August and September are normally weak for equities. These are merely seasonal trends and there are always exceptions. The U.S. congress is in recess and we should see the midterm election campaigning pick up speed, which could sour consumer and investor attitudes. The S&P 500's current bull market is now the second longest bull market in the last 85 years. The average bull market lasts about 165 weeks. This bull market is 283 weeks old. The question investors might start asking is what is the next catalyst to power stocks higher, especially if Europe and Asia are slowing down?

Keep an eye on bond yields. Right now falling bond yields would suggest smart money is not bullish on stocks or the economy.