It was another volatile week in the stock market. A barrage of headlines shook investor confidence. The overall concern seemed to be slowing global economic growth. On Wednesday the World Bank reduced their 2015 growth estimates from 3.4% down to 3.0% and their 2016 estimate from 3.5% down to 3.3%. Crude oil hit new six-year lows. The U.S. dollar hit 11-year highs versus the euro thanks in part to a bunker-busting bomb dropped by the Swiss National Bank - more on that in a moment. The markets also digested hacked twitter accounts with tweets that appear crafted to move stocks but fortunately they failed to have much effect.

The volatility has been significant. The S&P 500 normally trades in 10-point swings for the day. Lately it has been trading with 30-point swings. Banking stocks were hammered with a -4% loss on the week thanks to disappointing earnings results from the likes of JPM, C, BAC, and GS. Homebuilder stocks suffered a -3.7% drop for the week (for many the declines were worse) after KB Home (KBH) said they might miss their margin targets for 2015. The SOX semiconductor index underperformed with a -3.1% decline. The transportation average lost another -1%. Meanwhile biotechs continued to show relative strength with a +2.3% bounce in the group. Friday's oversold bounce in the broader market snapped a five-day losing streak and pared the S&P 500's loss for the week down to -1.24%. The NASDAQ fell -1.5% and the small cap Russell 2000 index lost -0.7% for the week.

Swiss National Bank Currency Surprise

The biggest story of the week came out of Europe on Thursday. Back in 2011 while Europe struggled with its debt crisis the value of the euro was plunging. People were dumping euros and buying the stronger Swiss franc. This rise in the franc was impacting Switzerland's economy. A rising currency makes their exports more expensive overseas and harder to compete in the global market. In September 2011 the Swiss National Bank (SNB) announced a cap on their currency. They would peg the franc at a maximum of 1.20 to the euro. They kept it there the last three years. In the process the SNB had purchased hundreds of billions of euros as more and more people moved their money out of euros and into the safety of the franc.

Last month the SNB had promised (again) that they would protect their currency and that they were willing to buy an unlimited amount of euros. That all changed on Thursday at 10:30 a.m. Central European Time. The SNB said they were removing the minimum exchange rate of 1.20 francs to a euro. The market collapsed on this unexpected currency bomb. The Swiss stock market was down -13.7% in the next two hours (the biggest decline on record). By the end of the day their stock market closed with a -8% decline.

The moves in the currency market were earth-shaking. The value of the Swiss franc soared +30% against the euro and 25% against the U.S. dollar. That's a +30.00% move. Normally currencies move in +/- 0.01 points. The carnage was immediate thanks to leverage. In the U.S. investors can trade forex (foreign exchange currencies) with 50-to-1 margin. If you deposit $1,000 in your account you can trade $50,000 worth of currencies. That means a -1% move against you cuts your account value in half (you now have $500 instead of $1,000). A -2% move reduces your account to zero. The -30% move against you in the franc on Thursday means your $1,000 account was suddenly -$15,000. In other countries their rules on leverage are different with 100:1, 200:1 or more.

Many traders and brokers were wiped out. At least two forex brokers immediately went bankrupt and closed their doors. A big one in the U.S. is foreign exchange broker FXCM. The company said the move in the Swiss franc generated a -$225 million drop in client accounts. Shares of FXCM were trading down almost -90% premarket. The company negotiated an emergency loan of $300 million from Leucadia National (LUK) to keep their doors open. Citigroup said it lost about $200 million on the currency move. Barclays estimated their own loss of $100-to-150 million.

The SNB moved their deposit rate from negative 0.25 to negative 0.75 (-0.75%). This is a record as no central bank has ever set their interest rate so low. That means they're charging people (and banks) money to keep their deposits in Switzerland. Why would they drop their interest rate this low? It's because they want to stop people from moving their money into Switzerland. As the euro currency falls in value you have all of Europe looking for a place to protect the value of their deposits.

It was widely reported that removing the currency peg of 1.20 francs per euro will have a huge impact on a big number mortgages. A lot of people were pricing their mortgages in Swiss francs. Suddenly that mortgage is 20% higher than it was the day before. Reports suggest this was common practice in Hungary and Poland.

The big currency move is going to have a negative impact on the entire country of Switzerland, especially anyone who exports products as their goods for sale now cost +25% more than they did on Wednesday.

Oil Forecasts

The value of the franc soared against the U.S. dollar but it also pushed the euro lower as well. That puts upward pressure on the dollar. The dollar hit 11-year highs against the euro. A rising dollar makes commodities less expensive since a dollar buys more. Crude oil hit six-year lows last week with a drop below $45.00 a barrel. Fortunately for energy stocks the price of oil rebounded by week's end to close near $48.50 a barrel.

The price of oil has been influencing market action for weeks. Billionaire businessman, Saudi Prince Alwaleed bin Talal, said that we will never see oil above $100 a barrel again. Never is a long time. That's a tough call to make and right or wrong it did not do oil bulls any favors. Meanwhile, last week Goldman Sachs lowered their 2015 WTI oil price forecast. Their three-month forecast was reduced from $70 to $41 a barrel. The reduced their six-month estimate to $39 and their 12-month target to $65 a barrel. Another firm, Societe Generale, reduced their forecast on Brent crude from $70 a barrel to an average of $55 for 2015. Bloomberg reported that analysts at Energy Aspects Ltd are suggesting crude oil could dip to $30 a barrel before finding a bottom.

Hacked Social Media

The war between the West and radical Islam moved online last week. Supposedly ISIS sympathizers hacked multiple U.S. military social media accounts last Monday. Obviously not a tactical strike but more of a propaganda move for them. Meanwhile over 19,000 French websites have been attacked by Islamic hackers since the Charlie Hebdo murders.

On Friday the hacking took a different route. The New York Post's twitter account and the UPI news twitter accounts were hacked with tweets stating U.S. Federal Reserve chairman Janet Yellen was calling an emergency meeting to lower interest rates. Then there was another hoax tweet about Chinese anti-ship missiles fired at USS George Washington. These did not appear to be done by ISIS or other terrorist affiliated groups but more likely someone trying to move the U.S. stock market. Fortunately they had little impact.

Economic Data

Economic data in the United States was mixed again. The New York Empire State manufacturing survey improved from December's reading of -1.2 to January's reading of +9.9. The Philadelphia Fed manufacturing survey saw its December reading revised down from 24.5 to 24.3 while the January results plunged to 6.3.

The consumer price index (CPI) gauge on inflation fell sharply. November's CPI was -0.3% while December's came in at -0.4%. That is thanks to a -4.7% plunge in energy prices. The core CPI, which excludes food and energy was flat in December.

A big disappointment last week was U.S. retail sales. The general theory has been that falling gasoline prices are bullish for consumer spending. Yet the December retail sales number plunged -0.9% in December. That's the biggest drop in almost a year. Excluding gasoline sales the pace of purchases dropped -0.4%. If you remove the more volatile automobile category the pace of consumer spending dropped -1.0%. Reuters said economists are calling the monthly report a "blip" but that's rather odd considering it's the December reading, when holiday sales should have been soaring.

There seems to be a divergence between consumer sentiment and spending. Normally analysts believe strong consumer sentiment means strong spending. Obviously that's not the case. Last week the University of Michigan consumer sentiment index improved +4.6 points to 98.2. That's an 11-year high. The present conditions component hit 108.3, the best reading since May 2007. The expectations component rose to 91.6, the highest level since early 2004. The consumer looks pretty happy but they're not opening their wallets and appear to be saving the $750 a year the average driver will save from low gasoline in the U.S. this year (that's about $62 a month).

Overseas Economic Data

Most of the headlines overseas paled in comparison to the Swiss National Bank's decision to remove their currency peg on the franc. This pushed the euro back below its 1999 launch value. Meanwhile the Eurozone CPI data dropped -0.1% month over month. German stocks rallied last week with the DAX index closing at an all-time high on Friday.

The SNB move on currencies has increased the expectation that the European Central Bank (ECB) will launch some form of QE at their next meeting. Estimates have been around 500 billion euros worth of QE to start.

Elsewhere we are going to hear a lot more about Greek elections, which come up on January 25th. The latest polls suggest the left-wing Syriza party is poised to win. That could generate significant volatility in European markets as the group could lead Greece to a turbulent exit from the Eurozone.

Major Indices:

Investors are starting to worry about a potential top in the S&P 500 with the index down three weeks in a row. The index bounced twice near 1,988 in the last three days. That could qualify as a mini-double bottom. Friday's big bounce of +1.3% pared the index's loss to just -1.24% on the week. Unfortunately the oversold bounce was probably fueled by bears covering their short positions ahead of the long, three-day weekend.

There is a decent chance the bounce continues on Tuesday but the 2,050-2,060 area is probably short-term resistance. It looks like the S&P 500 is building a new short-term trend of lower highs. If the rebound fails then the December low near 1,972 and the simple 200-dma (near 1966) are potential support although I would not put a lot of faith in either level holding very long. Year to date the S&P 500 is down -1.9%.

chart of the S&P 500 index:

The NASDAQ bounced near the early January lows. You can also see the new trend of lower highs forming on the daily chart. I would expect short-term resistance near 4,700. If this bounce rolls over then 4,550 is the level to watch for support. Below that then the 200-dma near 4,440 or the 4,400 levels are potential support. Year to date the NASDAQ is down -2.2%.

chart of the NASDAQ Composite index:

The small cap Russell 2000 index surged +1.9% on Friday. That reduced its weekly loss to just -0.7%. Of course it closed just below potential support near 1,180. The 1,200 level is also overhead resistance.

The key support levels to watch are probably 1,150 and 1,135 (December low). Year to date the $RUT is down -2.5%.

chart of the Russell 2000 index

Economic Data & Event Calendar

It's going to be a holiday-shortened week for the U.S. market with Monday's holiday. The focus this week will be on the upcoming ECB meeting and how much QE the central bank might announce or if Draghi disappoints the market yet again.

We might also get headlines out of the annual Davos World Economic Forum, which occurs January 21st through the 24th this year.

Plus, we are right in the middle of Q4 earnings season, which will generate plenty of news.

Economic and Event Calendar

- Monday, January 19 -
U.S. markets are closed for holiday
(Martin Luther King, Jr. Day)
China's Retail Sales
China GDP

- Tuesday, January 20 -
NAHB housing market index

- Wednesday, January 21 -
Housing Starts & Building Permits

- Thursday, January 22 -
ECB meeting
ECB President Draghi press conference

- Friday, January 23 -
Existing Home Sales

Additional Events to be aware of:

Jan. 25th - Greek Elections
Jan. 27-28th FOMC two-day meeting
Jan. 28th - FOMC policy update

Looking Ahead:

As we look ahead it might be time to turn more defensive. The first two full weeks of 2015 have been more volatile than many expected. Terrorist attacks and surprise central bank currency moves are not something one can predict with any accuracy. The U.S. dollar continues to rise as investors seek safety.

We are also seeing a flight to safety in U.S. bonds. The yield on the 30-year U.S. note sank to multi-decades lows on Friday with a dip to 2.35%. The yield on a 10-year U.S. bond hit an 18-month low of 1.7% on Friday morning before bouncing. This will likely continue. Bond yields for the major players in Europe are under 1%. That makes the 10-year bond in the U.S. way more attractive.

Folks on Wall Street tend to think that bond investors are smarter than stock investors. This rally in bonds could be seen as a big warning signal for the market and the U.S. economy.

Looking at the week directly in front of us I would not be surprised to see the U.S. market churn sideways until the ECB meeting on Thursday. Granted the market could churn in a wide range but there is going to be a huge focus on if the ECB does finally launch some sort of QE program and how big will it be and what shape will it take. Thursday morning could be volatile for the stock market as investors try to interpret headlines out of Europe.

Meanwhile the surging U.S. dollar is negative for any company with significant revenues overseas. We could hear more and more corporations warning about the currency impact on future earnings. Corporate guidance will be a big influence on what direction the market heads next.

My outlook has not changed from last week. I'm bullish on the market for 2015 but short-term I am suggesting a neutral approach. The next two weeks could see a lot more volatility with the ECB meeting and then the Greek elections on January 25th. I would not be in a rush to launch new long-term LEAPS positions. The market has been overdue for a correction. Currently the S&P 500 is only down -3.1% from its high set in late December. Why rush to buy now when we might get a better entry point significantly lower? A -8% to -10% correction would mean a pullback into the 1,920-1,875 range.

~ James