The first week of September 2014 was a busy one for economic data. The U.S. markets were closed last Monday for Labor Day and spent the last four days churning sideways. Only after a bounce from Friday's lows did the major indices manage to eke out another weekly gain. Now the S&P 500 is up five weeks in a row but still struggling to escape the gravitational pull of the 2,000 level.

The big events last week were a lot of central bank action overseas, a cease-fire in Ukraine, and the jobs report in the U.S. The ECB lowered rates and announced new asset purchases. Weakness in the euro helped lift the U.S. dollar index to 13-month highs. This in turn pressured commodities. Oil, gold, and silver all posted a loss for the week. Meanwhile the U.S. market managed to shrug off disappointing labor market news. The Dow Industrials inched up +0.2% for the week. The NASDAQ composite gained +0.06%. The S&P 500 closed up +0.22% while the small cap Russell 2000 lost -0.36% for the week. The Dow Transports were showing relative strength with a +2.3% gain.

Economic Data

U.S. economic data was mostly bullish with the exception of the jobs report. The ISM manufacturing index came in better than expected with a rise from 57.1 to 59. The ISM non-manufacturing index improved from 58.7 to 59.6. This is the best reading since January 2008. Numbers above 50.0 suggest growth and expansion. The Federal Reserve's Beige Book report was generally benign. The ADP employment change report said the U.S. gained 204,000 new private sector jobs in August. Unfortunately this wasn't reflected in the BLS report.

Friday's jobs data was a huge disappointment. Economists were expecting the U.S. to gain 230,000 new jobs in August. The headline number came in at 142,000. The unemployment rate inched down from 6.2% to 6.1% and nearing a six-year low. This is likely due to another drop in the labor-force participation rate, which fell to a 36-year low at 62.8%.

At 142,000 new jobs, the August nonfarm payroll report is the worst jobs report of the year and snapped a string of +200K jobs numbers. Out of the dozens of economists polled by the financial media no one was expecting a jobs number this low (at 142K).

The falling labor force participation rate is another worry. We dipped this low back in October but before that we haven't seen a participation rate this bad since the 1970s. There is a record 92.2 million Americans not in the labor force. Of the 150 million or so that are working about one third of them are working part time. The average workweek has been stuck at 34.5 hours for six months in a row.

Analysts have suggested that the August jobs number might mean the U.S. economy is still at risk for stagnation. This will likely keep the Federal Reserve on a dovish path. Fed Chairman Janet Yellen warned us that the labor market was still facing challenges and advised patience. Friday's disappointment reaffirms her outlook. Investors might interpret Friday's jobs number as a reason for the Fed to delay raising interest rates next year, which would be considered bullish for stocks.

Overseas Economic Data

There was a ton of economic data overseas. Germany's Q2 GDP estimate was left unchanged at -0.2% and the Eurozone's Q2 GDP was also left unchanged at +0.0% growth. Germany said their industrial production came in better than expected with +1.9% growth. French manufacturing PMI improved from 46.5 to 46.9 (still in contraction). Italy's manufacturing PMI and Spain's manufacturing PMI numbers both declined with Italy's falling into contraction territory.

Eurozone retail sales came in worse than expected with a -0.4% monthly decline. Their retail PMI slipped from 47.6 to 45.8 (in contraction territory). French unemployment worsened from 10.1% to 10.2%. The Bank of England left their interest rate policy unchanged. Yet the European Central Bank (ECB), in a widely telegraphed move, announced new asset purchases. What surprised some folks was the ECB's decision to lower interest rates. The ECB's main refinance rate has been adjusted from 0.15% to 0.05%. They also reduced the deposit facility rate and the marginal lending rate. Their plan to buy asset-backed securities is being called QE-light but there seems to be some confusion over just what kind of debt and how much ABS purchases the ECB might make and if it will have any impact on the Eurozone. The euro currency declined following the ECB's announcement with the currency hitting new 13-month lows.

The Bank of Japan left their interest rate policy unchanged. Japan said their manufacturing PMI declined from 52.4 to 52.2, which was a little worse than expected. China reported its manufacturing PMI declined from 51.7 to 51.1. The HSBC China manufacturing PMI slipped from 50.3 to 50.2. This is nearing contraction territory under 50.0. The services readings were healthier. China's official non-manufacturing PMI improved from 54.2 to 54.4. The HSBC China services PMI reading surged from 50.0 to 54.1.

Ukraine-Russian Conflict

While we are on the topic of overseas headlines I have to mention the latest developments in Ukraine. Wednesday last week there was some confusion surrounding a story of a potential ceasefire. Ukraine was talking about a permanent cease-fire deal between Ukraine and Russia. Then Russia countered saying how can we be part of a cease-fire deal if we're not involved in the conflict in Ukraine.

The next day (Thursday) began a two-day NATO summit in Wales. At the same time the U.S. and Europe were preparing another round of sanctions aimed at Russia. Naturally Russia tried to downplay both the NATO summit and the sanctions. Russia responded saying that NATO was supporting extremists in Ukraine and would interfere with the peace progress in the region.

On Friday there were new headlines of a cease-fire to begin at 6:00 p.m. in Ukraine. These new peace talks involved Ukraine, Russia, the Ukrainian rebels, and a representative of the Organization for Security and Cooperation in Europe (the OSCE). Sadly the cease-fire didn't seem to last very long. There was new artillery fire and shelling in Donetsk and Mariupol. The rebels claimed they were "taking Mariupol" through social media. Yet both sides accused the other of violating the cease-fire. It's being reported that Ukraine President Poroshenko spoke with Russian President Putin on Saturday to try and keep the cease-fire going. Tensions in the region remain elevated.

Major Indices:

The S&P 500 almost didn't make it but a decent bounce from its Friday morning lows pushed it to a meager gain for the week. That has extended its bounce from the August lows to five up weeks in a row. The S&P 500 ended the week at a new all-time closing high and up +8.6% year to date. The challenge right now seems to be breaking away from the 2,000 level, which is acting like a magnet.

If the S&P 500 can keep the rally going then I would look for resistance near 2020-2025. We can look for potential support in the 1970-1980 region. However, 1950 might be a better area to watch since it would currently line up with the bottom of the bullish channel on the weekly chart (see below).

chart of the S&P 500 index:

Weekly chart of the S&P 500 index

The NASDAQ's gain for the week was less than three points. Wednesday's move has produced a bearish engulfing candlestick reversal pattern. That might still be in play. If the NASDAQ does see a pullback we can look for support in the 4485-4500 area (prior resistance). If you believe in the measured move concept then the NASDAQ's current rally could be targeting 4800.

At the moment these are 14-year highs and the NASDAQ is up +9.7% year to date.

chart of the NASDAQ Composite index:

The small cap index snapped a four-week winning streak with a four-point decline last week. The $RUT did appear to find support near 1160 on Friday. If this index retreats lower we can look for potential support at 1140, 1120, and 1100. Likewise if the $RUT bounces then 1180, 1200 and the highs near 1210 are potential resistance.

chart of the Russell 2000 index

Economic Data & Event Calendar

The pace of economic data slows down this week. Investors might be nervous as we approach the 9/11 terror attack anniversary. Putting geopolitical fears aside the market will likely focus on Apple's product announcement September 9th and the next FOMC meeting on September 17th.

Economic and Event Calendar

- Monday, September 08 -
Consumer credit data
Japan Q2 GDP estimate (update)

- Tuesday, September 09 -
NFIB small business optimism survey
Japan consumer confidence
Apple's (AAPL) product announcement

- Wednesday, September 10 -
Wholesale inventory data

- Thursday, September 11 -
Weekly Initial Jobless Claims
13th anniversary of the 9/11 attacks

- Friday, September 12 -
U.S. retail sales data
Import/export data
University of Michigan consumer sentiment

Additional Events to be aware of:

Sept. 17th - FOMC meeting and updated economic forecast
Sept. 17th - Fed Chairman Yellen press conference

Looking Ahead:

The last few weeks have seen very low trading volumes. Could this mean that institutional traders are sitting on the sidelines waiting for a pullback? The week ahead could also be a light-volume week as we near the 13th anniversary of the September 11th, 2001 terror attack on the U.S. We already know that the U.S. is picking up increased chatter among terrorist-affiliated communities as we near the anniversary. The U.S. government is concerned there could be an attack on or near our unsecured southern border with Mexico. Meanwhile Europe and the Middle East are probably worried about missing jetliners from a Libyan airport.

There has been some confusion over these missing airliners. Are they missing, have they been destroyed, or have they been stolen? About two weeks ago the rebel group Libyan Dawn gained control of a Tripoli airport. Supposedly they stole 11 jetliners. The worry is that they could use (or sell) these planes to terrorists hoping to duplicate the 9/11 attacks in the U.S.

Officially the U.S. says they can't confirm that these jetliners have been "stolen" but then the government probably doesn't want to cause a panic either. One argument is that these planes were merely moved to another airport but if that's true they still can't find nine of them. Southern Europe and the Mid East are all potential targets if terrorist do have these planes and can find pilots for them.

If we can set aside our concerns over terror threats and ISIS/ISIL then investors should be able to focus on the market. Right now stocks are arguably looking tired. The S&P 500 has gone almost 1,070 days without a -10% correction lower. This is also the second longest bull market in the last 85 years.

Fewer and fewer investors are bearish. The latest investor's intelligence advisor sentiment report saw bearish investors drop to just 13.3%. That is the lowest level since 1987. From a contrarian standpoint, if everyone is bullish, then this is very bearish signal. Of course these are sentiment indicators, which can stay at extremes and do not necessarily mean the market will reverse tomorrow.

While people point out some of the bearish warning signals there are also bullish signals. The Dow Transportation Average displayed relative strength last week and broke out to new all-time highs. Dow Theory would tell you that strength in the transports is bullish for the market. Basically if the transports are doing well then it's a bullish indicator on the broader economy. We'll have to keep an eye on the price of oil. Crude oil is down sharply from its June highs and could be due for a bounce. Yet a rising dollar will continue to pressure oil lower. If Ukraine and Russia make peace it should help push oil lower. On the other hand if we see a new terrorist attack there might be a knee-jerk reaction higher in oil prices.

Forgive me if I sound like a broken record but the path of least resistance is still higher.