The Stock Trader's Almanac January indicator is now negative for the second year in a row. That doesn't bode well for the bulls but stocks managed to shake off this bearish signal last year. The U.S. market appears to have a serious case of indigestion as it tries to stomach another round of disappointing economic data and growing concerns that Greece could be headed for an Eurozone exit. Stocks ended the month of January with losses, marking the first time the S&P 500 has seen two down months in a row since 2012.

The U.S. dollar's rally stalled last week snapping a six-week winning streak against its peers. This dip in the dollar allowed oil to bounce and crude oil surged +5.2%. Precious metals did not bounce with gold down -0.7% and silver plunging -5.6% on the week. On January 27th the price of gasoline finally bounced. Inside the U.S. the price of gas had fallen 123 days in a row. That streak of declines was an all-time record.

Money flowed out of U.S. stocks and into the safety of bonds. The yield on the U.S. 10-year bond closed at new 52-week lows at 1.67%. The rally in the 30-year note accelerated. Yields on a U.S. 30-year bond ended the week at 2.25%. I've seen this labeled as both a 65-year low and also as the lowest close in history. Wall Street tends to think that bond investors are smarter than stock investors and if money is rushing into bonds that doesn't bode well for stocks. Although to be fair that simplistic idea that a rally in bonds is bad for stocks does not hold up over long periods of time.

Chart of the U.S. 10-year Bond Yield

Chart of the U.S. 30-year Bond Yield

Economic Data

There were a number of economic reports last week. The Chicago PMI data came in better than expected with a jump from 58.8 in December to 59.4 in January. Unfortunately the Dallas Fed manufacturing survey came in worse than expected with a drop to -4.4 when analysts were looking for a reading near 3. Numbers above 50 suggest growth in the PMI data and below zero the Dallas survey suggests contraction. Durable goods orders came in worse than expected. November's durable goods orders were revised lower from -0.9% to -2.1%. December's reading came in at -3.4%.

There were a number of data points on housing. Pending home sales soured with a -3.7% month over month drop. Yet new home sales soared +11.6% in December to an annual pace of 481,000. That's the best reading since mid 2008. The Case-Shiller 20-city Home Price Index reported a +4.3% increase for November. That probably has homeowners feeling good about their personal wealth. Rising home prices and plunging gasoline prices probably played a role in the University of Michigan Consumer Sentiment survey hitting an 11-year high with an improvement from 93.6 in December to 98.1 in January. Another positive data point was the weekly jobless claims, which crashed -43,000 to 265,000. That's the lowest weekly result since the year 2000.

We did just have a two-day FOMC meeting. The Fed's statement said they felt the U.S. economy's growth was "solid" and that sounds like an improvement from their previous term of "moderate" growth. They also pledged again to be patient before raising interest rates. Many believe this "patient" language suggest any rise in interest rates is at least two meetings away.

The first estimate on U.S. GDP growth in the fourth quarter was a disappointment. 2014's Q3 GDP growth was a stunning +4.9%. Economists were expecting the pace of Q4 growth to slow down into the +3.0% range. Unfortunately last week's data showed Q4 GDP at only +2.6%, virtually half of the prior quarter. The full year 2014 GDP growth comes in at +2.4%, which is up from 2013's +2.2% growth.

Overseas Economic Data

Overseas economic data was also disappointing largely due to worrisome deflation numbers. Denmark's central bank is in panic mode. They just cut their deposit rate for the third time in two weeks. The latest move adjusted the deposit rate from minus 0.35% to minus 0.5%. This means that banks have to pay the Danish central bank 0.5% to keep their money there. The country faces a challenge now that the European Central Bank (ECB) has announced a QE program the euro has been falling against the Danish krone. Denmark is trying to keep the euro/kroner exchange rate within 2.25% on either side of 7.46038 kroner to the euro. They do not want their krone to get too strong. How long they can keep this up is a good guess. In January we just saw the forex markets explode when Switzerland gave up on trying to peg their Swiss franc to a specific exchange rate against the euro.

Germany, Europe's largest economy, just saw its inflation rate turn negative with a -0.3% monthly decline. That hasn't happened since 2009. The wider Eurozone saw their consumer price index (CPI) data drop -0.6%, which was worse than expected and sharply lower from the prior reading of -0.2%. Accelerating deflation is bad news for the entire region and it looks like the ECB is once again behind the curve. Europe has been trying to avoid the deflation monster for years and it looks like it has finally caught up to them.

In other news the Eurozone saw their unemployment rate inch down from 11.5% to 11.4%. The Eurozone business and consumer survey improved from 100.6 to 101.2. European stocks delivered their best one-month performance since 2011. The rally in stocks is not a surprise given the ECB's historic QE program announced in January. U.S. stocks have enjoyed years of QE fueled market gains. Now it might be Europe's turn.

Data out of Asia was relatively quiet. Japan said their industrial production rose +1.0% after a -0.5% the month before. Japan's unemployment improved from 3.5% to 3.4%. Meanwhile there appears to be growing speculation that China will reduce its annual growth forecast from 7.5% down to 7.0%. The country is already growing at its slowest pace in 24 years. A slowing China and a slowing Europe are going to make it really tough on the U.S. to keep its economic expansion going.

Major Indices:

It was a rough week for the S&P 500 index with a -2.7% decline. That capped its worst monthly decline in a row. As I mentioned earlier the S&P 500 just produced its first back to back monthly declines since 2012. On the weekly chart you can see that its down four out of the last five weeks.

The 1,985-1,990 area is short-term support. Below that the December lows near 1,972 might be support but I doubt it. I suspect that if the S&P 500 closes below 1,970 it's probably headed for the 1,900 area. Should the market see a correction then a -10% pullback from the 2,090 closing high would be about 1,880.

chart of the S&P 500 index:

Weekly chart of the S&P 500 index

The NASDAQ suffered a -2.5% pullback last week. Year to date the index is down about -2.1% versus the S&P 500's -3.1% decline. Fortunately the NASDAQ still has support in the 4,550 area. Should this level break I would expect the next level of support near 4,400.

chart of the NASDAQ Composite index:

The small cap Russell 2000 index only lost -1.9% for the week, which means it held up better than its big cap rivals. Year to date the $RUT is down -3.4%. The index appears to be churning between support near 1,150 (underpinned by its simple 200-dma) and resistance near 1,200.

A breakdown under 1,150 would probably signal a drop toward the December low around 1,135. Below that the next level of support would be around the 1,082 lows the $RUT saw in mid 2014.

chart of the Russell 2000 index

Economic Data & Event Calendar

It's the first week of a new month and that means lots of economic data. After the disappointing Q4 GDP number people might be watching the ISM index for clues how the country performed in January. The ADP report on Wednesday will be a prelude to Friday's jobs report.

We're also deep in the middle of Q4 earnings season. More than 100 companies in the S&P 500 will report earnings this week.

Economic and Event Calendar

- Monday, February 02 -
Personal income and spending
ISM index
Eurozone PMI data

- Tuesday, February 03 -
Factory orders
Auto & truck sales

- Wednesday, February 04 -
ADP Employment Change Report
ISM services

- Thursday, February 05 -
German factory orders

- Friday, February 06 -
Nonfarm payrolls (jobs) report
Unemployment rate

Looking Ahead:

Speaking of earnings there has been an interesting divergence. Currently almost 80% of the S&P 500 companies that have reported earnings have beaten Wall Street's estimates on the bottom line. That's higher than normal and massive corporate stock buybacks might be the reason why (fewer shares outstanding boost your profit per share). Only about 58% of companies that have reported have managed to beat estimates on the revenue side.

Of course earnings data is looking in the rearview mirror. Wall Street wants to hear corporate guidance. Unfortunately about 80% of companies have issued negative or disappointing guidance for the first quarter. This is significantly above normal. Not surprisingly with the U.S. dollar near 11-year highs a lot of companies are blaming the dollar for hurting profits and they believe currency headwinds will continue to hurt in the Q1 2015.

Wall Street's outlook on earnings growth has plunged. Two months ago analysts were expecting Q1 earnings growth of +8.6% (five months ago it was +9.9%). Now, after a wave of negative earnings guidance, analysts are actually expecting Q1 earnings growth to be negative 0.2% (another firm is forecasting -1.6% earnings decline). Not surprisingly a lot of this earnings weakness is coming from the oil industry. Last fall analysts were expecting energy companies to show +3.3% earnings growth in Q1. Today that estimate has crashed to -53.8%.

The U.S. Federal Reserve faces a conundrum. They want to raise rates. However, if they do raise rates the U.S. dollar will rise even further which will hurt U.S. corporate profits even more (half of S&P 500 company revenues come from overseas). Pushing the dollar higher will further depress commodities (already crashing), which will only generate more deflationary pressures.

A good example of the lack of economic growth and falling demand for commodities is the Baltic Dry Index. The BDI measures shipping rates to rent a cargo ship that typically carries metals, grains, and fossil fuels. This can be used as a leading indicator since for global economic growth. Today the Baltic Dry Index is down to 26-year lows.

Chart of the Baltic

Earlier I mentioned how the stock market just produced a bearish January indicator. This signal was first noted back in the early 1970s by Yale Hirsh, the publisher of the Stock Trader's Almanac. Essentially if the S&P 500 is negative for the month of January then the entire year will end up negative. Hence the saying, "so goes January, so goes the year." Since 1950 there have been eight times this indicator did not work giving it a 87.7% accuracy in predicting the year's success (positive or negative for the year). Last year January was negative but the S&P 500 delivered a +11% gain for the year.

I wouldn't get too upset about this one signal. Late last year the team at Stock Trader's Almanac were forecasting 2015 could very bullish. The combination of where we fall in the presidential election cycle, and years ending in the number 5, and other arcane stock market trivia all indicate 2015 should have a positive undercurrent to it. I suggest we take all of these forecasting signals with a grain of salt.

My market outlook hasn't changed. The last few weeks I've been neutral while bullish for the year in general. A massive QE program in Europe should be bullish but it will have a tougher job to succeed than the QE programs in the U.S. thanks to the composition of the European Union. Greece remains a thorn in the market's paw and will probably get a lot worse before it gets better. The Q4 GDP number suggest the U.S. is not as strong as we had hoped. The globe is starting to see deflationary pressures accelerate. On top of everything the overwhelming trend in corporate earnings guidance has been too cautious. We could be setting up for a market correction. As long-term LEAPS traders we can use any market correction as a bullish entry point but we have to be patient and wait for the right time to jump in.

~ James