Worries about what the Federal Reserve might say about raising rates fueled a three-week decline in the big cap indices. This fear were overblown. The Fed did remove the word patient from their statement but offered a very dovish outlook. The dollar reversed sharply lower in response to the Fed's statement and the Fed Chairman Yellen's comments. This currency weakness fueled big gains across the markets for equities and commodities.

The bounce in stocks was very widespread. The S&P 500 snapped a three-week losing streak. Meanwhile the small cap Russell 2000 hit new record highs. Stocks in housing, transportation, and in the semiconductor indices all delivered big gains. Yet biotech remains the best performer. The biotech industry was up +4% last week and it's currently up +23% year to date.

The U.S. dollar's big drop, something I've been warning investors about, sparked widespread gains for commodities. Gold rose +2.2% for the week. Silver was up +7.2%. Crude oil surged to a +3% gain on the week after falling to new six-year lows before the Fed's statement was released. This fueled a rally across the energy sector with the oil index up +4.3% and oil service stocks up +3.2%.

Chart of the U.S. dollar index

The U.S. dollar index, which measures the strength of the dollar against a basket of six major currencies, had rallied to 12-year highs a week ago. I cautioned readers that the pace of the rally was unsustainable. The Fed's statement sparked a very sharp, one-day drop on Wednesday afternoon. Some market commentators were calling it a mini flash-crash in the dollar. Wednesday's decline was the biggest, one-day drop in six years.

It was not a surprise to see crude oil bounce on dollar weakness but the move is probably temporary. The European Central Bank (ECB) has only just begun its QE program. The euro currency will continue to sink and that will lift the dollar again. Meanwhile the U.S. continues to see huge increases in crude oil inventories. Last week saw inventories rise another +9.5 million barrels. Current oil inventories in the U.S. are at another 80-year high at 458.5 million barrels. This number is up more than 76 million barrels in just the last ten weeks.

Weekly Chart of WTI crude oil

Chart of the WTI crude oil

Right now a lot of oil refineries are doing maintenance before switching to the summer blend of gasoline. Plus, Americans tend to do more driving in the summer time. Demand for oil will rise in the next couple of months. However, there is still a risk that the U.S. could run out of storage before that happens.

Last week saw the number of active oil and gas rigs fall for the 15th week in a row. Baker Hughes said the active rig count dropped another -56 rigs to 1,069. Oil rigs were down -41 and natural gas rigs dropped -15. The number of active rigs has fallen -44% from 1,931 in September to 1,069 today. We could be headed toward the 2009 lows near 866 active rigs. Here's the crazy thing. U.S. oil production actually hit a new 38-year high last week at 9.419 million barrels a day. That's because there is a delay between shutting down a rig and oil production declines.

Dennis Gartman, the Commodities King, believes that oil is going a lot lower. On CNBC this past week he said it would not surprise him to see crude oil drop to $15 a barrel. That's pretty extreme. There are plenty of analysts that believe we'll see crude oil in the $30s. The good news is that lower oil prices are going to bring lower gasoline prices with them.

You may recall that as oil was plunging in the fourth quarter last year we saw the price of gasoline decline for a record-setting 123 days in a row. Gas hit a national average low of $2.05 a gallon in January. A few areas actually saw gasoline below $1.60 a gallon. The price of gas then bounced 40 days in a row. Today the national average is $2.42. If crude oil continues to sink we could see gasoline back near the $2.00 area. Unfortunately, this will probably be another short-term boon for the economy. Eventually the impact of shutting down all of those drilling rigs will cut oil production and prices will bounce.

Economic Data

Economic data in the United States continues to disappoint. Industrial production from January was revised lower from +0.2% to -0.3% and February's reading was only +0.1%. The New York Empire State Manufacturing Survey dipped from 7.8 in February to 6.9 in March. The Philly Fed business outlook survey slipped from 5.2 in February to 5.0 in March.

The NAHB Housing Market index, a sentiment survey of homebuilders, declined from 55 to 53 when analysts were expecting a gain. The February housing starts plunged -17% to an annual pace of 897,000. Most blamed the record-breaking snowfall on the East Coast for the decline but that's not completely true. Other areas of the country not affected by the weather also saw a slowdown.

Fed Meeting

The big event for the week was the Federal Reserve's open market committee (FOMC) meeting. The two-day meeting ended on Wednesday. The stock market has been agonizing for days over if the Fed would remove the word "patient" from their statement. The Fed did choose to remove the word patient but they went out of their way to state that just because we're not patient doesn't mean we're impatient - essentially we are in no rush to raise rates.

Technically the Fed can raise rates at any time but the committee also said they want to be "reasonably confident" that inflation would hit the 2% mark before raising rates. That's not going to happen any time soon. The Fed actually lowered their inflation forecast from +1.0%-1.6% down to +0.6%-0.8%. The Fed also revised their 2015 GDP forecast from +2.6%-3.0% down to +2.3%-2.7%.

The fed funds futures rate measures the odds of a rate hike in the future. After last week's statement and Fed Chairman Janet Yellen's dovish comments in her press conference the expectation for a rate hike have plunged. Estimates for a hike in June are in the 0%-11% range. Expectations for a hike in September dropped from 55% to 39%. Now many believe that the Fed will not hike rates at all this year.

Overseas Economic Data

Economic data in Asia was mixed. Japan said their Tankan Index data for March improved from 11 to 16. They also saw their All Industries Activity index rise +1.9% for the month. Meanwhile the Bank of Japan Governor Kuroda spoke like a true politician - out of both sides of his mouth. The BoJ lowered their inflation forecast last week toward zero percent but Kuroda claims he still expects Japan's CPI to hit their 2.0% target in 2015.

China continues to see economic data slowdown. The latest look at real estate saw home prices decline for the tenth month in a row with another -5% decline. That didn't stop the rally in Chinese stocks. The Shanghai index soared more than 7% last week to hit new seven-year highs. That's because investors are speculating that the government will launch new stimulus measures to boost the economy. The Chinese government recently confessed their economy will decline from 2014's +7.5% growth rate. Chinese Premier Li Keqiang said that current 2015 estimates of +7% might be too optimistic.

The rally in European stocks continued as well. Britain's FTSE 100 index hit a new record high and traded above the 7,000 mark for the first time. Meanwhile the German DAX index rebounded from its midweek lows and is close to challenging its all-time highs set just over a week ago.

Greece remains a perpetual thorn in Europe's side with constant bickering about what the country will and won't do. Europe has been tempting Greece with another 7.2 billion euro rescue payment to avoid a liquidity crisis in the country. Unfortunately they can't agree on the reforms necessary to qualify for this next load of cash. Greece has a history of promising reforms and then not following through. The EU finance ministers just concluded another two-day meeting on Friday. Little was accomplish but the Eurogroup claims Greece will produce a new reform plan in the next few days.

Major Indices:

March has been a volatile month for the big cap stocks. The S&P 500 has not been able to manage back-to-back gains since February. The back and forth is a sign of investor fear and indecisiveness. Thanks to the Fed's dovish stand on rates the market did see widespread gains. The S&P 500 rallied +2.6% last week and that left the index up +2.39% year to date.

The recent record highs from late February are now overhead resistance in the 2,120 area. The nearest looks like 2,080, 2,060, and 2,040.

chart of the S&P 500 index:

(March) chart of the S&P 500 index:

The NASDAQ delivered a +3.1% rally for the week. More importantly the NASDAQ composite has broken through round-number resistance at the 5,000 level. These are new 15-year highs. You could argue the NASDAQ is short-term overbought but the path of least resistance seems to be higher.

Ideally the 5K mark would be new short-term support. I'd look for potential support 4,950 and 4,900. Year to date the NASDAQ is up +6.1%, thanks to big gains in the biotech industry.

Keep a close eye on the multi-month trend line of higher highs that has been resistance in the past.

chart of the NASDAQ Composite index:

Thus far small caps have been big winners in 2015. The Russell 2000 index surged +2.78% to hit new all-time highs last week. The breakout past resistance in the 1,240 area is good news and this level should be new support. It's hard to say what will be resistance now with the $RUT in blue sky territory. Year to date the RUT is up +5.1%.

chart of the Russell 2000 index

Economic Data & Event Calendar

The week ahead is pretty quiet for economic data. It's also void of any big events. The FOMC meeting is over. The Q1 earnings season doesn't start until April 8th with Alcoa (AA)'s earnings report.

We will see another estimate on Q4 GDP but that's in the rearview mirror. Today investors are worried about Q1 GDP growth.

Economic and Event Calendar

- Monday, March 23 -
Existing Home Sales
HSBC China PMI data

- Tuesday, March 24 -
Consumer Price Index (CPI)
New Home Sales

- Wednesday, March 25 -
Durable Goods Orders

- Thursday, March 26 -
Japan's CPI data

- Friday, March 27 -
U.S. Q4 GDP estimate (third estimate)
University of Michigan Consumer Sentiment survey

Additional Events to be aware of:

April 29th - FOMC policy update
May 7th - Election in the United Kingdom

Looking Ahead:

I just mentioned GDP growth. This past week we saw the Federal Reserve revise their 2015 GDP forecast from +2.6%-3.0% down to +2.3%-2.7%. That could be too optimistic. Two weeks ago the Atlanta Fed downgraded their Q1 GDP estimate from +1.2% to +0.6%. This past week they downgraded their forecast again and now expect only +0.3%. We have also seen a parade of disappointing economic data in the U.S. over the last several weeks. The odds of the Fed raising rates any time soon is probably zero.

Investors should worry about slowing U.S. economic growth and slowing earnings growth, not rate hikes. The U.S. dollar did see a pullback last week but the trend is higher. This will continue to put pressure on big multi-national companies. Meanwhile the small cap index is at new highs because most small caps are domestically focused and thus the rising dollar has less of an impact on their corporate earnings. We are less than three weeks away from the Q1 earnings season. That means the next couple of weeks is earnings-warning season as companies confess they're going to miss estimates before it's too late.

Ray Dalio is an incredible investor. He founded Bridgewater Associates, which is the biggest hedge fund in the world with $165 billion under management. Dalio just warned his clients that the Federal Reserve has created a risk that the stock market could see a 1937-style decline when they eventually raise interest rates. In his note to clients Dalio cautioned, "If one agrees that either a) we are near the end of the developed country central bankers' ability to be effective in stimulating money and credit growth or b) the dollar is the world's reserve currency and that the world needs easier rather than tighter money policies, then one would hope that the Fed will be very cautious about tightening." For this reason our funds are avoiding concentrated investments at this time. That means the smartest guy among the smart money traders is turning cautious due to potential volatility surrounding central bank moves.

Please note I'm not bearish on the stock market. I am merely noting some of the potential pitfalls that could plague the market. On a short-term basis stocks could be poised for some profit taking. April 15th is the tax deadline for Americans. It's not uncommon for investors to sell some stocks to pay their tax bill, especially with the U.S. market at or new their highs. On top of that we're also nearing the last few days of the third quarter. Stocks might see some window dressing before the quarter ends, which could squeeze stocks higher. At the same time, funds could be selling some stocks to handle investor redemptions (to pay the tax man).

Big picture - the market's trend is still higher. The NASDAQ and the Russell 2000 might be due for a little rest. I'd like to see the transportation average breakout to new highs after four months of consolidating sideways. If the S&P 500 does close above 2,120 then it could definitely feed into any quarter-end window dressing.

~ James