Last week was revenge of the big cap stocks. Previously the market was worried that the strong dollar would seriously hurt Q1 results for big cap companies who do a lot of business overseas. It has been a common thread throughout this earnings season. Yet that hasn't stopped a bunch of high-profile big cap names surging on their earnings results and driving the market higher. The fuel behind Friday's rally was mostly thanks to (AMZN +14.1%), Starbucks (SBUX +4.8%), Google (GOOGL +2.9%), and Microsoft (MSFT +10.4%). These stocks boosted the NASDAQ composite to a new all-time closing high and a +3.25% gain for the week.

The Dow Industrials added +1.4% last week. The S&P 500 rose +1.75% while the Russell 2000 gained +1.25%. Not everything was in rally mode. The semiconductor index is lagging with the SOX index down -0.3% for the week. Banks are not participating with the banking index only up +0.12%. Friday saw the biotech stocks fail to participate in the widespread rally as well.

Investors were digesting a number of headlines last week. We started the week on a strong note thanks to news out of China that its central bank had eased monetary policy to try and boost their economy again. Another unsuccessful Eurogroup meeting about Greece on Friday failed to derail the market's up trend. Stocks continue to ignore the generally disappointing economic data since weak growth means central banks will remain more accommodating.

Economic Data

Sales data from the U.S. real estate market was mixed. Existing home sales for March rose +6.1% to an annualized pace of 5.19 million units. Yet the Department of Housing and Urban Development said new home sales for March plunged -11.4% to 481,000. February's number was revised higher from 539K to 543K, which is essentially a seven-year high. Honestly, I find it hard to put much stock in these numbers when the margin of error is +/- 20%.

The durable goods orders saw a headline number surge +4.0% in March versus a -1.4% drop in February. Economists were only expecting a +0.6% gain. Unfortunately, almost the entire gain was due to a +112.8% surge in demand for defense-related aircraft orders. Total orders for aircraft was up +43.8% after a -30% drop in February. If you exclude the volatile transportation figure then the core durable goods orders actually fell -0.5% compared to estimate for a +0.3% gain in the core rate.

Another disappointment was the pace of business investment spending, which fell for the seventh month in a row in March. We also saw the Atlanta Federal Reserve downgrade their Q1 GDP forecast yet again with a reduction from +0.2% down to +0.1% growth.

Overseas Economic Data

Asian markets remain strong. The Chinese Shanghai Composite and Hong Kong Hang Seng indices are both near seven-year highs. The Japanese NIKKEI crossed the 20,000 mark for the first time in 15 years. The Chinese economy is slowing and the government is trying to stimulate it. Last weekend the People's Bank of China lowered the reserve requirement ratio for banks from 19.5% down to 18.5%. This 100-basis point move is the biggest cut since November 2008. It's also the second reduction in the last two months. They need to do something. The most recent manufacturing PMI data for China came in worse than expected with a drop from 49.6 in March to 49.2 in April. This is a one-year low and numbers below 50.0 suggest economic contraction. Japan's PMI number also came in below expectations and fell from 50.3 in March to 49.7 in April. You may recall that the Bank of Japan is in the middle of a massive QE program that makes the U.S. one look tiny by comparison.

PMI data out of Europe was also worse than expected. The Eurozone Flash manufacturing PMI for April fell from 52.2 to 51.9. Their services PMI dipped from 54.2 to 53.7. Germany's flash manufacturing PMI data for April slipped from 52.8 to 51.9. Yet Germany's latest sentiment survey, the Ifo Business Climate index, rose from 107.9 to 108.6, which was better than expected. Deflation remains an issue. Germany PPI data for March was down -1.7% versus a year ago. Spain's PPI was down -1.2% year over year. On the plus side analysts are expecting big improvement in European corporate Q1 earnings thanks to the weak euro.


The Greece situation is not getting any better. The Eurogroup meeting on Friday did not yield any results. The other EU finance ministers are getting frustrated with Greece's stalling tactics. Greece keeps asking for more rescue money and Europe has finally said enough is enough. They're not willing to lend Greece any more bailout funds until Greece agrees to new, stricter reforms. Greece refuses any new austerity and in the press Greek leaders have threatened to leave the Eurozone before accepting new reforms. This past week there was a new wrinkle in this situation. The idea of Greece defaulting on its debt but not leaving the Eurozone. How or if that is a possibility remains to be seen.

The next several weeks could be explosive for the European markets. The next Eurogroup meeting to discuss the Greek situation is May 11th. The very next day (May 12th) Greece has a €750 million payment to the International Monetary Fund. There is also a rumor that Greece does not have the money to pay government salaries and pensions this week, which would be about €2 billion. Greece also has several billion euros worth of payments due in June and July this summer. Odds of a Greek default are definitely rising and yields on Greek 10-year bonds are 12.7%.

Major Indices:

The S&P 500 is up three days in a row and flirting with all-time highs. It's amazing the difference a week can make since the prior Friday stocks looks troubled with a deep sell-off across the major indices. Last week's rally has pushed the S&P 500's 2015 gain to +2.8%.

The 2,120 level is resistance. Beyond that we can speculate on potential resistance at 2,140 and 2,160. The short-term trend line of higher lows would suggest support is around 2,080.

chart of the S&P 500 index:

Weekly chart of the S&P 500 index

The NASDAQ composite was the big winner last week thanks to huge moves in some of its largest components. On Thursday the NASDAQ set a new record with a close at 5,056, which was above the prior closing high of 5,048 set on March 10th, 2000. Now traders will be looking for the NASDAQ to rally past its intraday high of 5,132.52 (also March 10th, 2000). Friday's high was 5,100. Year to date the NASDAQ is up +7.0%.

There have been plenty of comparisons between the NASDAQ at 5,000 today versus 5,000 back in the year 2000. Fifteen years ago 65% of the NASDAQ's market cap was technology stocks and there were over 4,800 companies in the NASDAQ composite. Today technology stocks only account for 43% of the NASDAQ's capitalization while the number of companies is down to around 2,500.

New highs in the NASDAQ is exciting but technically it could be facing some challenges. Last week saw some pretty big gains in many of the NASDAQ's big cap stocks. This has lifted the index toward a multi-month trend line of resistance (shown on the daily chart). The odds that last week's big winners will see some profit taking this week are pretty darn high, which means the NASDAQ will likely retreat from this resistance. On the plus side, broken resistance at 5,000 could be new support.

chart of the NASDAQ Composite index:

Intraday chart of the NASDAQ Composite index:

The small cap Russell 2000 index lagged behind its large cap peers. It did manage a gain for the week and is only a few points away from another record high. Thus far the $RUT has managed to maintain its bullish trend of higher lows. A breakdown below this trend line (on the daily chart) could be a warning signal. Potential support levels are 1,240 and 1,220. The $RUT's 2015 gain is now up to +5.0%.

chart of the Russell 2000 index

Economic Data & Event Calendar

The pace of economic data picks up this week. We'll get a couple of regional fed surveys plus two consumer sentiment survey. The big reports for the week will be the first estimate on U.S. Q1 GDP growth and the FOMC policy update. Both come out on Wednesday, which could make for a volatile session.

No one expects the Fed to move rates at this meeting so the focus will be their commentary. The market will dissect the Fed's statement word by word looking for any clue on when they will hike rates next. If the Fed suggests they could hike rates in June then stocks could decline since most analysts expect the Fed to wait until September-October before their first rate hike.

- Monday, April 27 -
Texas manufacturing outlook

- Tuesday, April 28 -
Richmond Fed survey
Consumer Confidence survey
Case-Shiller 20-city home price index

- Wednesday, April 29 -
Pending home sales data
U.S Q1 GDP estimate
FOMC policy update

- Thursday, April 30 -
Chicago PMI data
Personal Income & Spending
Employment Cost Index

- Friday, May 01 -
ISM index for April
University of Michigan consumer sentiment survey
Auto & truck sales

Additional Events to be aware of:

May 7th - Election in the United Kingdom

Looking Ahead:

We are in the midst of Q1 earnings season. Thus far investors have been relatively forgiving when it comes to the U.S. dollar negatively impacting results. Currently 67% of the S&P 500 companies that have reported earnings have beaten estimates on the bottom line. Only 52% have beaten the street's revenue estimates. As we get deeper into earnings season the earnings quality is expected to decline but at the same time the impact of the dollar should have less of an impact.

Josh Brown, with the, shared some interesting data last week. Looking at S&P 500 data over the last 50 plus years there have been 48 times when the index produced a -5% pullback. I was surprised that number was not a lot higher. Only 17 of the 48 pullbacks went on to a -10% decline. Only 9 of the 48 corrections did the S&P 500 continue falling and drop -20% or worse. Josh is suggesting that when the market provides a -5% correction it is normally a buying opportunity. It's true that 20% of the time it's the start of a bear market but that means 80% of the time it is a false alarm. If you don't feel like chasing stocks at new highs you could wait for the next -5% correction.

Overall it would appear the path of least resistance is higher. Investors are choosing to interpret disappointing economic data as evidence the Fed will remain on the sidelines and that central banks around the world will remain accommodative. I suspect the big wildcard will be Greece. The next six weeks or so could be a major turning point for Greece and the Eurozone. If Greece defaults and/or leaves the euro it will most likely generate a lot of volatility in Europe and to a lesser extent here in the U.S.

~ James