Investors are probably happy that April is over since stocks could not decide what direction they wanted to trade. Markets suffered alternating up weeks and down weeks as traders digested wave after wave of earnings news. Last Tuesday (April 28th) was interesting as the market reacted to news that Iran had seized a U.S. cargo ship in the Strait of Hormuz. Initial reports were incorrect. The ship, Maersk Tigris, has a flag from the Marshall Islands*, which is a U.S. protectorate. The U.S. is legally bound to protect the Marshall Islands but based on last week's actions it appears the U.S. is not so eager to protect their ships. As of Friday the ship and crew were still being held captive by Iran. It is worth noting that the U.S. navy is now escorting American ships through the strait.

Last Wednesday's FOMC announcement was a non-event. The Fed made a few changes to their statement and eliminated any calendar references as to when they might raise rates. They did reiterate their current stance to stay on the sidelines until the committee is confident that U.S. inflation will hit their 2.0% target. A couple of days later another Fed governor said they could raise rates at any time.

Overall it was a rough week for stocks. The U.S. market faded lower and then saw its decline accelerate on Thursday. Then suddenly the market rebounded sharply higher on Friday. Friday was noteworthy since several foreign markets were closed for May Day or International Worker's Day (May 1st). By the closing bell on Friday all the major U.S. indices were still in the red for the week. The Dow Jones Industrials did the best with only a -0.3% weekly loss. The S&P 500 fell -0.4%. The NASDAQ lost -1.7%. The small caps underperformed with the Russell 2000 index down -3.1% for the week.

Banking stocks and semiconductor stocks were showing some relative strength with both indices up +1.6%. This was overshadowed by a big sell-off in biotech stocks. Even with the big bounce on Friday the biotech index still lost more than -5% for the week. Oil service stocks were big winners thanks in part to a rally in crude oil. The oil service index rallied +5% last week.

Crude oil gained +3.5% for the week and soared +20% for the month. This was due to multiple factors. First and foremost was a sell-off in the U.S. dollar. The dollar did bounce on Friday, which snapped an eight-day losing streak, but the dollar is down a whopping -3.5% for the month of April. Last month's decline in the dollar ended a nine-month winning streak. A weaker dollar makes commodities more expensive (it takes more dollars to buy them).

Chart of the U.S. dollar ETF

Another issue is the growing expectation that oil has found a bottom. U.S. oil inventories are still growing (new record highs) but the pace of growth is slowing. The same can be said for active rigs. We're still seeing declines for the number of active rigs (down a record 21 weeks in a row) but analysts seem to think we're nearing a bottom. The weekly rig count showed 27 more rigs shut down so now we're down -53% from the recent peak. That leaves just 905 active rigs in the U.S.

Economic Data

The trend of mixed U.S. economic data continues. After falling two months in a row the Chicago PMI data improved with a rise from 46.3 in March to 52.3 in April. The ISM manufacturing index was unchanged at 51.5 in April. This is near a two-year low. Numbers below 50.0 suggest contraction for both reports.

The Conference Board's Consumer Confidence index fell from 101.4 to 95.2. The University of Michigan's Consumer Sentiment survey's final April reading was unchanged at 95.9 versus a 93.0 reading in March.

The biggest report for the week was the advance estimate on U.S. 2015 Q1 GDP growth. Most analysts estimates were in the +1.0% range. The Atlanta Federal Reserve was estimating +0.1%. The official headline number came in at +0.2%, which is a huge drop from the +2.2% growth in the fourth quarter of 2014. There is always a chance the +0.2% reading is revised lower with the next estimate. With growth this strong it's not surprising to see the Fed on the sidelines.

Overseas Economic Data

It was a quiet week for economic data overseas. Thankfully we didn't hear a lot of news on the Greece situation. That will likely change this coming week as Greece near its next debt payment on May 12th.

Looking at last week we saw China report their official manufacturing PMI was unchanged at 50.1. Japan's manufacturing PMI for April was 49.9, which is improving from 49.7. Numbers below 50.0 indicate economic contraction. Japan unfortunately saw their retail sales numbers fall -9.7% in March.

Major Indices:

The big cap S&P 500 tagged a new all-time high on Monday morning (April 27th) but that proved to be the high for the week. Thursday's loss saw the S&P 500 breakdown under its 50-dma but the index delivered a big bounce on Friday. This index is only nine points away from a new all-time closing high.

The level to watch is resistance around 2,120. A strong close above 2,120 could rejuvenate the rally. On a short-term basis I'd watch for support near 2,080 and 2,040. The simple 200-dma might offer some support near 2,025. Year to date the S&P 500 is up +2.4%.

chart of the S&P 500 index:

I cautioned readers last week that the NASDAQ was facing resistance at its trend line of higher highs. The index failed at this level and produced a four-day decline. If the current bounce fails we can watch for potential support near 4,900 and 4,800. Currently the NASDAQ is up +5.7% for the year.

chart of the NASDAQ Composite index:

It was an ugly week for the small cap Russell 2000 index. Not only did it underperform the other major indices but the $RUT broke down under multiple layers of support including the 1,240 level, its 50-dma, and its trend line of higher lows. The $RUT tested support near 1,220 and its 100-dma on Thursday's drop.

Now the 1,240 to 1,280 area is overhead resistance. If this pullback continues the most likely support levels are 1,200 and its 200-dma near 1,180. Year to date the $RUT's gain has fallen to +1.9%.

chart of the Russell 2000 index

Economic Data & Event Calendar

The Q1 earnings season is still going. This will continue to generate a lot of news and fuel volatility for individual stocks. Fortunately, about 80% of the S&P 500 companies have already reported. This week the majority of reports will be from small cap companies. More than 500 companies will announce earnings this week.

On the economic front we'll get the usual parade of data at the beginning of the month. The big report to watch will be the nonfarm payrolls on Friday morning. Last month's (the March number) was a disaster at 126,000. Currently economists are hoping for 245,000 new jobs in April and the unemployment rate is expected to fall -0.1% to 5.4%.

- Monday, May 04 -
Factory Orders

- Tuesday, May 05 -
ISM Services (non-manufacturing)
China HSBC Services PMI

- Wednesday, May 06 -
ADP Employment Change Report

- Thursday, April 07 -
Elections in the United Kingdom

- Friday, May 08 -
Nonfarm payrolls (jobs) report
Unemployment rate
Wholesale inventory data

Looking Ahead:

Seasonally the stock market tends to struggle to make any progress in May. We've all heard the "sell in May and go away" phrase. That's because research shows the worst six months of the year for stocks starts in May. Just because historically the next six months tend to underperform doesn't mean stocks can't rally. The team and Stocks Trader's Almanac did notice that the S&P 500 index averages a +0.2% gain in pre-election year Mays. That's not very inspiring.

The bigger worry is probably the slowing U.S. economy. Analysts are still blaming the cold winter weather on the Q1's +0.2% GDP growth. That seems a little naïve. Consensus estimates for the second quarter are still at +3.3%. Yet the Atlanta Fed, which pretty much nailed the first quarter number, is only forecasting +0.8% GDP growth in the second quarter. That's a pretty big divergence. If the jobs number this coming Friday is another big miss then stocks might see sharp correction lower.

We also have to worry about Greece again. The company has a big debt payment to the International Monetary Fund (IMF) coming up on May 12th. They have two more big payments to the European Central Bank later this summer. Without some sort of breakthrough in negotiations there is virtually no way that Greece will be able to make all of these payments (total is close to eight billion euros for all three). Here's the funny thing, Three of the top four credit ratings agencies would not declare a default if Greece missed one of these payments. That's because they consider the IMF and ECB to be non-standard creditors. You can read the Reuters article here.

Last week's market-wide decline sparked some bearish calls. In the midst of the sell-off influential trader Dennis Gartman said he expects a -5% to -8% correction. He was suggesting the market will see a short two or three week correction and then recover.

The longer-term trend on the major U.S. indices is still higher. The last three or four weeks have felt more volatile, thanks to earnings season generating some pretty big moves for individual stocks. My biggest concern is the weakness in the Russell 2000 ($RUT). Last week's sell-off in the $RUT just erased the prior six-weeks of trading. If the $RUT closes below 1,200 or its 200-dma near 1,180 it could be a warning signal for the broader market.

The Greek issue is another wildcard. I would hesitate to launch a bunch of new positions over the next week or two. The market could get jittery as we near the May 12th deadline for Greece.

~ James

*Marshall Islands - This is a small country in the Pacific Ocean. It's about 70 square miles of very small islands with a population around 60,000 people. It's not a surprise that the Pentagon's legal team has decided the U.S. has no obligation to rescue the recently captured ship from Iran. That's because most ships flying a Marshall Islands' flag are not actually from the Marshall Islands. Foreign companies register their ship with the Marshall Islands because the country doesn't charge taxes on revenues from these registered ships.