Fears over the Federal Reserve raising rates too soon combined with worries over the surging U.S. dollar and its impact on corporate profits. Together they helped push the big cap S&P 500 index to its third weekly loss in a row. Transportation and biotech stocks were a couple of exceptions to the market's decline. Small caps also managed to buck the market's trend with the Russell 2000 index posting a gain for the week.

The main story last week seemed to be the rally in the U.S. dollar and with good reason. The European Central Bank (ECB) started their QE program on March 9th. This accelerated the decline in the euro and in response the dollar surged to new 12-year highs.

Almost half of the S&P 500 companies get their sales outside the United States. A stronger dollar makes American products and services more expensive. The big complain during the Q4 earnings season was how currency headwinds hurt results. This is going to be an even bigger concern in the first quarter of 2015. Many thought the euro/dollar pair might find support near $1.10 or possibly $1.06 (1.00 euro for $1.06 dollars). Today it's down to $1.0497 and now it is virtually consensus that it's heading to parity ($1.00). There are new forecasts suggesting the euro could fall toward $0.80 in the next couple of years.

Chart of the U.S. dollar

Long-Term Chart of the U.S. dollar

The dollar index is up +23 percent against a basket of currencies in the last eight months. That is a HUGE move in the currency world. Most commodities are traded in dollars. That means a rising dollar pushes commodity values lower. Last week's rally in the dollar saw gold lose -0.7% to close near three-month lows in the $1,150 an ounce region. Silver had a rough week with a -1.5% drop to five-year lows near $15.50 an ounce. It was crude oil that really suffered. Concerns over vanishing storage and strong U.S. production combined with the dollar rally to push WTI crude oil down -9.3% last week. Oil-relate stocks dropped -3.1% while the oil service stocks plunged -6.6%.

Crude oil has fallen below $45.00 a barrel. Two months ago we saw crude oil hit a five-year low near $43.60 a barrel. Odds are really good we're going to see a new low soon, especially since U.S. inventories continue to climb with a successive string of 80-year record highs.

Meanwhile the number of active oil and gas rigs dropped for the 14th week in a row. Drilling companies shut down another 56 oil rigs and another 11 natural gas rigs. The number of active rigs is now off -806 from the September 2014 high of 1,931. The company that keeps this rig count is Baker Hughes and they're predicting a drop of 50% from the high. We're currently at 1,125 so we're getting close.

Economic Data

Economic data in the United States continues to disappoint forecasters. February retail sales was a shock with a -0.6% decline. Economists were expecting +0.3% increase. January saw a -0.8% decline and February's reading is the third monthly drop in a row. Vehicle sales were very weak with a -2.5% decline. Plenty of analysts blamed the weather. East of the Mississippi river saw 23 states experience one of the "top-10-coldest" Februarys on record, according to the National Oceanic and Atmospheric Administration.

Essentially it was so cold that consumers just stayed inside. They might be right. We did see online retail sales increase +2.2% in February, which was the biggest jump in about a year. However, there is also a camp of analysts that believe consumers are just saving more and spending less. There was a big expectation that super low gasoline prices would help boost consumer spending but we just didn't see any evidence this occurred.

The Producer Price Index (PPI), a look at wholesale inflation, was another shocker. Economists were expecting the PPI to rise +0.5% in February. Instead we got a -0.5% drop. This is the fourth decline in a row and February was the biggest drop since 2009. Surprisingly the reason behind February's drop appears to be food prices. Food prices are down three months in a row.

Another missed estimate was the Consumer Sentiment reading for March. Analysts were expecting the University of Michigan Consumer Sentiment survey to rise from 95.4 to 95.5. Unfortunately the March number dropped four points to 95.4. It was the biggest miss against expectations since February 2006.

Overseas Economic Data

Japan seems to be showing some improvement. Their Q4 GDP estimate was revised from +1.5% growth to +2.2% (year over year). Their industrial production from January surged +3.7% from the prior month. Japan's core machinery orders from January did fall -1.7% but that was better than the -4.1% estimate.

The Consumer Price Index (CPI) inflation gauge in China rose +1.4% in February from a year ago. That was significantly above expectations. Yet their PPI fell -4.8%.

Central banks around the world are desperate to fight off falling inflation (and/or deflation for some regions) on top of a slowing global economy. Their main weapon to fight falling inflation is easy monetary policy. This past week saw the central bank of Thailand, South Korea, and Russia all cut their interest rates. This pushes the number of central banks that have eased policy in 2015 up to 25. It was Russia's second interest rate cut this year.

Economic data out of Europe was a little bit quiet. The Eurozone Industrial Production slipped -0.1% for the month but it was still up +1.2% from a year ago. The Eurozone Sentix Investor Confidence survey came in better than expected with a rise from 12.4 to 18.6. I'm sure the Europeans expect their markets to rally the way U.S. markets did when the Fed launched its QE program. The German DAX stock market index hit new all-time highs last week.

Greece continues to haunt Europe. The European Commission launched into the technical details with Greece on how to met the requirements for the latest loan extension. Unfortunately European Commission President Jean-Claude Juncker express his frustration that Greece is not making enough progress. Meanwhile the new Greek leadership is still mouthing off and making its European partners uneasy. Last week the Greek Finance Minister Yanis Varoufakis said, "Greece is the most bankrupt country in the world and European leaders knew all along that Athens would never repay its debts." Naturally if you're in the rest of Europe, hearing comments like that from Greece, does not inspire you to loan them more money. Speaking of money, the Greek parliament is working on new laws that would allow the government to "use" private cash deposits and pension funds in the Bank of Greece to spend them on Greek bonds. You know the situation is getting pretty dire when the government is about to steal your bank deposits to pay their bills.

Major Indices:

It felt like a rough week for the S&P 500 but the index only lost -0.8%. That drop did erase its gains for 2015. The index found support near 2,040 on Wednesday and Friday. However, I'm not convinced the pullback is over. Investors should not be surprised if we see the S&P 500 drop toward the 2,000 mark and its simple 200-dma (near 2,003). This index is only down -3% from its all-time high set on March 2nd. A -5% pullback would mean a dip to 2,011.

chart of the S&P 500 index:

Intraday chart of the S&P 500 index:

Last week I warned readers that if the NASDAQ broke down under the 4,900 level it was probably headed for 4,800. That's still possible. However, you can see on the daily chart below the NASDAQ found short-term support near 4,845 and its 38.2% Fibonacci retracement of the February rally. Currently the NASDAQ composite is down about 137 points from its closing high of 5,008 set two weeks ago. I am expecting a dip to 4,800.

chart of the NASDAQ Composite index:

The chart of the small cap Russell 2000 index might be the most encouraging. The $RUT produced a big two-day bounce midweek and actually closed up +1.2% for the week. This index appears to be bouncing from a bullish trend of higher lows. It's only a few points away from a new all-time high.

The 1,240 area is short-term resistance. Should the index reverse we can watch for support near 1,200 and 1,160.

chart of the Russell 2000 index

Economic Data & Event Calendar

The week ahead is relatively quiet for economic data except for one major event. That will be the Federal Reserve's FOMC meeting on Wednesday. Their interest rate decision and statement should come out at 2:00 p.m. Eastern time. This week the Fed is also updating their economic forecast. This is followed by a press conference with Fed Chairman Janet Yellen at 2:30 p.m. Nothing else really matters. The market is constantly debating what the Fed will or will not do and when they might do it. This will be the one and only story for financial media this week.

In other news you might see headlines about Israel's big election on March 17th. Europe will be talking about a big solar eclipse on March 20th, which will block out 95% of sunlight for a big region. The options market should see a lot of volume since Friday is a quadruple witching expiration that only happens four times a year.

Economic and Event Calendar

- Monday, March 16 -
New York Empire State manufacturing survey
Industrial production

- Tuesday, March 17 -
Building Permits & Housing Starts

- Wednesday, March 18 -
Crude oil inventories
Federal Reserve policy update
Fed Chairman Yellen press conference

- Thursday, March 19 -
Philadelphia Fed manufacturing survey

- Friday, March 20 -
Quadruple-witching options and futures expiration

Additional Events to be aware of:

May 7th - Election in the United Kingdom

Looking Ahead:

Looking ahead there is only one story that matters this week and that's the FOMC meeting. The Federal Reserve has not raised rates since 2006. Their federal funds rate has been hovering at zero since December 2008. Everyone wants to know when the Fed will raise rates. We've talked about it ad nauseam and sadly it will remain the topic of conversation.

The better than expected February jobs report sparked big fears that the Fed might raise rates in June this year. Yet jobs is just one component the Fed needs to consider. Right now there is no inflation in the U.S. Wages are not rising too fast. U.S. economic activity seems to be falling. The U.S. dollar is skyrocketing. The rest of the world is seeing an economic slowdown. Raising rates now could be serious trouble and there is no reason to do so. The odds of the Fed raising rates in June "should" be zero (notice I said should).

The super spike in the U.S. dollar is a major factor here. According to Ellen Zentner, an economist with Morgan Stanley, the Fed will not raise their federal funds rate until March 2016. Zentner noted that every 1% rise in the U.S. dollar is the equivalent of a 14 basis point rise in interest rates because of the negative impact a rising dollar has on the economy. Currently the dollar is up more than +26% in the last nine months. That would be the equivalent of a +3.72% rise in interest rates. The Fed wants to raise rates but the dollar is already doing it for them.

There will be a ton of speculation about if the Fed removes the word "patient" from their language on Wednesday. It is believes that "patient" means any rate hike is still two meetings away. We have to remember the Fed likes to get creative with their language. They could remove the word patient and replace it with something else that suggests they are in no rush to raise rates. The Fed claims that their decisions are "data dependent" and right now all the data should be telling them to leave rates alone. We don't have to look any further than the Fed's own Atlanta Fed, who just reduced their Q1 GDP growth estimate from +1.2% to +0.6% last week.

This week the market is going to worry about the Fed's statement but what they should worry about is earnings. We've discussed this before. Analysts estimates for corporate earnings are plunging. At the beginning of 2015 consensus estimates for annual earnings growth was +8.1%. Today Wall Street is forecasting 2015 earnings growth of +1.7%. The first and second quarter estimates have turned negative. The biggest anchor weighing down earnings is the energy industry. Analysts are forecasting a -55% drop in earnings for oil companies. If the overall picture doesn't improve then 2015 could be the worst year for earnings growth since 2009.

The last week I suggested patience. The market pullback is actually a good thing for us as LEAPS traders. It can provide a better entry point for our next investment. Stocks might trade sideways on Monday and Tuesday as investors wait for the Fed policy statement. Then Wednesday afternoon and Thursday could be volatile. I would not be in a rush to launch new positions.

~ James