The U.S. stock market is ringing in the holidays with new highs. It was a holiday shortened trading week with the markets closing early on December 24th and closed all day on the 25th for Christmas. That didn't stop the rally with the Dow Industrials, the S&P 500, and even the small cap Russell 2000 closing the week at all-time highs. An oversold bounce in biotech stocks on Friday helped push the NASDAQ composite to a new 14-year high.

Biotech stocks did post a loss for the week but the group is still up +49.5% in 2014. The SOX semiconductor index boosted its 2014 gains to +30% while the Dow Jones Transportation Average rallied +2.3% for the week and raising its year to date gain to +24%. Crude oil continued to sink. Oil lost another -3% and posted its fifth weekly decline in a row. The commodity is off more than 40% for the year, the biggest decline since 2008. Crude oil is down about -50% from its 2014 highs.

2014 has been a great year for the stock market and volatility has been relatively mild. According to CNBC the S&P 500 has not had a four-day losing streak the entire year. Surprisingly, in spite of the bullish market performance, it has not been a good year for fund managers. Lipper, a research firm that analyzes mutual funds, said that normally 66% of fund managers do not beat their benchmarks. Yet this year 85% of all active managed funds have failed to beat their benchmarks. 2014 is poised to be the worst year for fund managers in 30 years.

Economic Data

It was a relatively quiet week for U.S. economic data. The final December reading from the University of Michigan Consumer Sentiment survey inched down from 93.8 to 93.6. This is still the highest reading since January 2007. The latest Durable Goods Orders number fell -0.7% in November after October's reading was revising down from +0.4% to +0.3%. Meanwhile new home sales hit an annualized pace of 438,000 in November. October's number was revised down from 458K to 445K.

The biggest economic report of the week was the U.S. Q3 GDP estimate. Many were surprised when the first estimate was +3.9% growth. Yet this last week that number surprised again after it was revised up to +5.0%. That's the highest U.S. quarterly GDP growth in over a decade. The closest comparable quarter was Q3 2003 when the U.S. grew +6.9%.

Overseas Economic Data

Economic data overseas was pretty quiet. European markets were closed on Friday for Boxing Day. Japan said their household spending improved +0.4% last month. Japan's unemployment rate was unchanged at 3.5%. In China the country's banking commission said there was an increase in non-performing loans. Yet that didn't stop the rally in Chinese stocks. The main Shanghai Composite has been soaring with the index up more than +20% in the last few weeks. There is growing speculation that the People's Bank of China (central bank) will provide more stimulus measures soon.

Major Indices:

The big cap S&P 500 index managed a +0.88% gain for the week. That puts the 2014 gain at +13%. Momentum did slow down a bit last week and the S&P 500 looks short-term overbought given the super sharp rebound from its mid December lows. I suspect the 2,100 level is round-number, psychological resistance. Should stocks see a pullback I'd watch for support near the 2,050 level.

chart of the S&P 500 index:

The NASDAQ's +0.8% gain last week has boosted its 2014 gains to +15%. It's not surprising to see the rally stall at resistance near the November peak and round-number resistance at 4,800. If the NASDAQ reverses here it will look like a potential bearish double top. Should the NASDAQ breakout higher then we'll start hearing market pundits talk about NASDAQ 5,000 in 2015.

chart of the NASDAQ Composite index:

The small cap Russell 2000 index was playing catch up last week. The $RUT sprinted higher with a +1.6% gain. The index managed to breakout past significant resistance at its 2014 highs around 1,212. That means the $RUT just closed at a new all-time high. It does look short-term overbought here. Bullish investors should be encouraged by the inverse head-and-shoulders pattern. This pattern would suggest a target of 1,340 for the $RUT.

chart of the Russell 2000 index

Economic Data & Event Calendar

It's another quiet week for economic data. The U.S. will get another regional fed survey (Dallas), another consumer confidence survey, and then the ISM report on Friday. Overseas we'll see retail sales from Germany, China's manufacturing PMI, and Eurozone PMI. The U.S. market will be closed again on January 1st for New Year's Day.

Economic and Event Calendar

- Monday, December 29 -
Dallas Fed survey
Germany's retail sales

- Tuesday, December 30 -
Case-Shiller 20-city home price index
Consumer Confidence survey
China manufacturing PMI data

- Wednesday, December 31 -
New Year's Eve
Pending Home Sales
Weekly initial jobless claims
Chicago PMI data

- Thursday, January 01 -
Markets closed for New Year's Day

- Friday, January 02 -
ISM Index
Construction Spending
Eurozone PMI data

Looking Ahead:

Today economists and stock market analysts are optimistic as we head into 2015. The U.S. economy appears to have finally shrugged off its persistent slow growth affliction. Consumer confidence is strong. Consumer spending is improving. Vehicle sales have been very healthy in 2014. Retail sales for the holiday will likely beat last year and the long-term averages. A lot of this improvement is likely due to the drop in oil prices.

According to AAA the price of gasoline inside the U.S. has fallen a record-breaking 92 days in a row. The national average is now $2.32 and some states are seeing prices below $2.00 a gallon. This is a huge boost for the consumers. That's good news since consumer spending accounts for nearly 70% of the U.S. economy.

Crude oil is likely to stay low in 2015. Ali al-Naimi, the oil minister of Saudi Arabia, was interviewed by CNN last week. He shot down any rumors that the Saudi's were colluding with the U.S. to bring oil prices down and hurt Russia. He also said that Saudi Arabia was not going to cut production and that they will never cut production. That's really bad news for other oil producers. There seems to be a growing camp of analysts predicting oil could drop toward $40 a barrel (or lower).

January is normally a bullish month for stocks. A Bank of America analyst said January is the second best month of the year. Since 1929 the month has produced gains 64% of the time. Januarys that follow a year where the S&P 500 delivered double-digit gains has an even higher chance of being positive.

Looking ahead into 2015 there are some seasonal factors at work that should be bullish for stocks. The researchers with the Stock Trader's Almanac have noted that pre-presidential election years (that's 2015 for us) are the best year of the four-year presidential cycle. They also point out that the fifth year of the decade, essentially any year that ends in a "5" has a strong history of gains. According to their research, in the last 130 years, only one time did the fifth year of the decade not produce gains. You could argue that 13 times is not a very big sample of data to rely on but it makes for interesting market factoids.

We have three trading days left in 2014. Volume will remain light this week. That could boost volatility with fewer buyers and sellers to even out moves in individual stocks. Historically the trend is higher. We're right in the middle of when stocks should see their Santa Claus rally.

I hope everyone had a wonderful 2014. We are looking forward to a great 2015.

Happy New Year!

~ James