It was a short trading week with the U.S. market closed last Monday. In that time frame stocks digested a number of events including the European Central Bank announcing a significant QE program. This pushed the euro to an 11-year low while the dollar rallied to an 11-year high. Dollar strength is pushing commodities like oil lower. Crude oil sank to new six-year lows and closed near $45.50 a barrel. Yet currency weakness around the globe is lifting precious metals. Gold prices rallied +1.0% last week while silver surged +2.9%.

Chart of the Euro ETF

Economic Data

It was a relatively quiet week for economic data. The Chicago Fed National Activity Index declined from +0.92 in November to -0.05 in December. Negative numbers suggest a slowdown in economic activity. It was the first negative reading in four months.

Elsewhere the NAHB housing market index retreated from 58 in December to 57 in January. The latest existing home sales data show sales rise from an annual pace of 4.93 million in November to 5.04 million in December. This was below expectations but a significant improvement from a year ago.

Overseas Economic Data

The Eurozone reported its manufacturing PMI improved from 50.6 to 51.0. Germany said its manufacturing PMI inched lower from 51.2 to 51.0. France saw improvement with their manufacturing PMI bouncing from 47.5 to 49.5. Numbers above 50.0 indicate growth and below 50.0 contraction.

Of course the big economic event in Europe was the much anticipated European Central Bank (ECB) meeting. The ECB tried to manufacture an artificial market rally by setting up expectations for the meeting. It was widely believed that the ECB would announce some form of quantitative easing but there were a lot of questions about how big it would be and what form it would take. The day before the ECB meeting's decision it was "leaked" that they might announce a QE program of €50 billion a month for two years. Then ECB governing council member Ewald Nowotny told reporters that investors should not get "overexcited" about the meeting on Thursday. They were trying to lower market expectations so their announcement of €60 billion a month, +20% above expectations, would be an upside surprise and fuel a market rally.

They were somewhat successful. The U.S. market did rally on the ECB news. The German market has been hitting all-time highs. The ECB left their interest rate unchanged at 0.05%. As far as their asset-buying program, they did announce a QE program of €60 billion a month through September 2016 or until the Eurozone hits their 2% inflation target. That makes the QE program worth about €1.14 trillion (about $1.28 billion).

ECB President Mario Draghi has a challenge that Fed Chairman Janet Yellen does not. Yellen has one country to deal with. Draghi has 19, each with their own economy and their own struggles. Nobody wanted citizens in one country on the hook to pay for another country's financial woes should their QE program fail to work. Therefore the 19 different central banks among the Eurozone members will each buy bonds from their own country for a grand total of €60 billion a month.

This program will begin in March 2015 although it is worth noting that Greece is not eligible to participate until July. The ECB needed time to negotiate with any new Greek government. More on Greece in a bit. What you might find surprising is that the very next day ECB member Benoit Coeure was already suggesting the ECB may need to do even more QE (QE2 anyone?) if the plan doesn't work. Josh Brown, with, noted that "The US needed three and a half rounds of QE over the course of 6 years and even now the benefits for the average worker or business are still debatable – despite how awesome all this stimulus has been for investors and large corporations. In Europe, it is even harder to create a wealth effect that transmits – Europeans have their retirements paid for by the government and so there is way less participation in the stock and bond markets by individual investors."

Meanwhile data out of Asia was not that great. Japan said their manufacturing PMI inched up from 52.0 to 52.1. Unfortunately their industrial production dropped -0.5% last month. China reported that its GDP rose +1.5% last quarter, which was below expectations. That puts the annual growth rate at +7.3%, which is the slowest pace of growth in 24 years. On the plus side Boqiang Lin, a Chinese energy economist, said China will save $100 billion on its oil import expenses in six months if crude oil prices stay near current levels (six-year lows).

Major Indices:

The S&P 500 saw a four-day rally before slipping lower on Friday. That puts its gain for the week at +1.6% and year to date the index is now only down -0.3%. The bad news is that the rally stalled right at its early January highs near 2,065. If the S&P 500 can rally then the next resistance level is the all-time high near 2,093 and what is probably round-number, psychological resistance at 2,100. Should stocks retreat lower then we can watch for support near 1,988 or the simple 200-dma near 1,970.

chart of the S&P 500 index:

The NASDAQ displayed relative strength last week with a +2.6% gain. That lifts the index into positive territory for the year with a +0.5% gain in 2015. The index managed to close just above short-term resistance at 4,750 but the NASDAQ might be due for a dip after rising five days in a row. If the rally continues then the recent highs near 4,812 are resistance. The nearest support appears to be the 4,550-4,565 area.

chart of the NASDAQ Composite index:

The small cap Russell 2000 managed a +1.0% gain last week. It's still down -1.3% for the year. The index appears to be range bound with support in the 1,150 area and resistance near 1,200 and 1,220. Fortunately the 1,150 area is supported by several key moving averages but that means a breakdown below this area would be pretty ominous.

chart of the Russell 2000 index

Economic Data & Event Calendar

This week will have two key economic events. The first FOMC meeting of 2015 is this week. The two-day meeting will end on Wednesday. The Fed is not expected to change interest rates. The focus will be on the Fed's statement and how much they change their economic forecasts. The next event is the U.S. Q4 GDP estimate. This is our first look at Q4 GDP. The consensus is currently estimating +3.0% growth, down from +4.9% in Q3. Right now Wall Street is pretty mixed on their Q4 outlook. There are some low estimates in the +2.0-2.5% range and some higher estimates in the +3.2-3.5% range.

Economic and Event Calendar

- Monday, January 26 -
(market reacts to Greek elections)

- Tuesday, January 27 -
Durable Goods Orders
New Home Sales data
Case-Shiller 20-city home price index
Consumer Confidence survey
FOMC meeting begins

- Wednesday, January 28 -
FOMC meeting ends, interest rate decision
Federal Reserve Policy Update

- Thursday, January 29 -
Pending home sales

- Friday, January 30 -
U.S. Q4 GDP estimate
Chicago PMI data
University of Michigan Consumer Sentiment (January)

Looking Ahead:

As we look ahead there is growing evidence that 2015 could be a bumpy ride for the stock market. Two weeks ago the World Bank cut their 2015 growth estimates. This past week the IMF joined in and reduced their 2015 global GDP forecast from +3.8% down to +3.5%.

We are in the middle of Q4 earnings season. Thus far only 179 companies have reported their results and about 60% have beaten Wall Street's earnings estimates. That's a little bit low. This coming week we will see 25% of the S&P 500 components report their Q4 earnings. Altogether, including non-S&P 500 companies, there will be over 450 corporate earnings reports released this week. One theme we could hear a lot of is how the rising U.S. dollar hurt sales overseas and how currency changes reduced margins. A few of the high-profile names to watch report earnings this week are Microsoft (MSFT) on Monday, Apple (AAPL) on Tuesday, Facebook (FB) on Wednesday, (AMZN), Alibaba (BABA), and Google (GOOG) all report on Thursday.

Saudi Arabia's New King

Another interesting development the markets digested last week was the death of Saudi Arabia's King Abdullah. After months of battling with pneumonia the king succumbed to his illness. He was 90 years old. His half-brother, 79-year old, Salman bin Abdulaziz, is the new king. Unfortunately Salman inherits the kingdom with several troubling issues. The country's archenemy Iran has seen significant growth in its political control of the region. ISIS is on Saudi's northern border with Iraq. ISIS-led rebels just took control of another neighbor in Yemen this past week. Economically Saudi's oil revenues have crashed with oil at six-year lows. All of this falls in the lap of a man that is widely reported as suffering with dementia. We could see more Iran-backed terrorists trying to take advantage of the political change in Saudi soon.

Greece Poised To Leave the Eurozone?

Sunday, January 25th is a big day for Europe all thanks to Greece. The very contentious elections took place today. Exit polls suggest the radical left-wing Syriza party is going to win. The question is how big of a win will it be? There are 300 seats in the Greek parliament. Syriza needs 151 to rule the country without having to form a coalition, which could be extremely tough to do. Right now it is estimated that Syriza has 35.5 to 39.5 percent of the vote. That's enough to give it 146 to 158 seats.

This is a serious challenge for the Eurozone. After five years of harsh austerity the Greece economy is in shambles and the people are fed up. The country has €320 billion in debt with about €240 of that from the massive, multi-year bailout. The Syriza party essentially ran its campaign on rejecting austerity, which will make negotiating with the Eurozone very unlikely. This would suggest Greece is poised to leave the Eurozone and shake the global markets. Should Syriza fail to reach the 151-seat necessary to govern alone they will have three days to build a coalition government. If they fail to find any allies then the country has to go through another election. One main problem is the late February deadline where Greece runs out of money and has to fulfill its obligations under current austerity rules to qualify for the next tranche of bailout funds.

The reality is that Greece, with a population of only 10 million people, is not that crucial to the global economy. The danger is if Greece does exit the euro, how will that effect the rest of the union? There are already several political parties throughout Europe that are clamoring to leave the Eurozone. If Greece's new government fails to work with the EU then they will either leave or be kicked out of the Eurozone. This will prompt a Greek bankruptcy. They'll most likely reissue the Greek drachma as their currency and quickly devalue it.


If Greece doesn't sink the global stock markets on Monday then Ukraine could pressure stocks lower. The fighting between Ukraine soldiers and Russian-backed rebels intensified last week. The United Nations said the conflict in Ukraine has surpassed 5,000 dead but the real number is probably a lot higher. The last ten days have seen fighting surge with the rebels on the offensive. The pro-Russian rebel leader, Alexander Zakharchenko, said he has no interest in peace talks with the Ukraine government. The Guardian ran an interesting article last week discussing the conundrum for Russia and its military dead. The families of Russian soldiers who died in Ukraine are pressuring the government. If a Russian soldier dies in action they are promised significant compensation of three million roubles plus an insurance payment of two million roubles, plus a monthly stipend. However, Russia is denying that any of its soldiers were in Ukraine and thus the relatives of these dead Russian soldiers are not entitled to any of this killed in action compensation. There are some reports of Russian soldiers refusing to right in Ukraine.

Map of Eastern Ukraine (by the BBC)

Market Outlook

The last couple of weeks I have been urging caution and suggested a short-term neutral outlook on the stock market. The first few weeks of January have been pretty volatile and it will likely continue this week as investors react to the Greece election news. In addition to Greece the Fed's outlook this week could also rattle the markets. All the major economies around the globe, China, Japan, and Europe, are slowing down. Japan and Europe are trying to stimulate their economies with QE and China is trying their own stimulus attempts but they don't appear to be working yet. Crude oil has crashed to six-year lows and is fueling significant deflationary pressure. It is widely believed that consumers would take the money they are saving at the gasoline pump and spend it elsewhere but thus far we are not seeing any significant evidence this is happening. Yet in spite of all of this the Fed appears to be on track to raise rates in about six months. That's why this week's fed meeting could be important. If the Fed says something that suggests they're going to postpone raising rates then U.S. stocks could rally.

~ James

P.S. I hope all of our readers in the New York City area stay warm and stay safe. The National Weather Service is forecasting a blizzard warning with snow starting on Monday morning that will turn into a blizzard by Monday afternoon.

You can read the warning at the webpage