The stock market choppiness continued last week. Monday's early gains faded and traders were starting to turn sour by Wednesday's lows. Big moves in the bond market both here and in Europe were generating concern. Fortunately stocks started to bounce on Thursday and then the goldilocks jobs report on Friday morning helped send stocks higher. The widespread rally on Friday saved the S&P 500 from another losing week.

The stock market spent the week essentially waiting for the jobs report on Friday morning. Midweek Federal Reserve Chairman Janet Yellen raised some eyebrows with her comments that stock valuations were "generally quite high." There were comparisons to Fed Chairman Greenspan's "irrational exuberance" speech where the market continued to rally for years afterward. Investors also recalled how Yellen warned about potential asset bubbles in biotech stocks and social media stocks last summer. Most of these stocks continued to surge throughout 2014 in spite of her comments.

The U.S. dollar continued to sink and posted its fourth weekly loss in a row. This helped fuel more gains for crude oil but crude suddenly reversed lower after its pop higher on Wednesday morning. WTI oil hit new 2015 highs near $62.50 a barrel on Wednesday. Now it's back in the $58-59 a barrel range.

Wednesday was noteworthy for oil because U.S. inventories posted their first decline (-3.9 million barrels) in 17 weeks. The weekly Baker Hughes rig count hit another record with 22 weeks in a row of declines in active rigs. Last week's drop was only -11, which is the smallest decline since early December 2014. The number of active rigs is down -58% from its recent high and we're getting close to the multi-year low of 866. Investors are starting to speculate that the buildup in U.S. oil inventories is over and that is going to be bullish for the price of oil going forward.

Economic Data

The economic data in the U.S. was light and what we got was mixed (as usual). The ISM non-manufacturing index improved from 56.5 in March to 57.8 in April. Numbers above 50.0 suggest growth. The ADP National Employment Report came out on Wednesday. March's report was revised lower from 189K to 175K. Economists were forecasting +200K for the April ADP number but the headline was only +169,000 private-sector jobs. This miss generated more fear over the government's jobs report for Friday.

Last month the market was shocked by the March nonfarm payroll number completely missing expectations with only +126,000 new jobs. That number was revised even lower to +85,000, the smallest monthly gain since June 2012. A week ago analysts were estimating +245,000 new jobs in April. That estimate had fallen to 220-225K by Friday morning. The headline number was +223,000 for April. Everyone considered it a "goldilocks" report that wasn't too hot or too cold.

The unemployment rate fell -0.1% as expected to 5.4%. The U.S. labor force grew by +166,000 workers and the labor force participation rate inched up +0.1% to 62.8%, still near 35-year lows. Since our population keeps growing the number of Americans not in the labor force actually hit a new high of 93, 194,000. The average hourly earnings rate ticked up +0.1% in April when economists were hoping for +0.2%.

The unemployment rate at 5.4% is close to a seven-year low. It's also nearing the Fed's 5.0% to 5.2% range that they consider full employment. The uneven job growth, lack of rising wages, and low labor force participation are all factors that would suggest the Federal Reserve is in no rush to raise rates. Thus the jobs data sparked a massive rally on Friday morning.

Overseas Economic Data

Economic data in Europe was overshadowed by the election in the U.K. and the Greece situation. We did see Eurozone services PMI improve from 53.7 to 54.1 in April. That was better than expected. Unfortunately retail sales in the Eurozone slipped -0.8% last month. Germany said their industrial production figures for March fell -0.5%, which was worse than expected.

The big story last week was the election in the United Kingdom. It was expected to be the most divided election in the country's recent history. Yet when it was all over the conservative party won by a large margin. The election results were so dramatic that leaders from the rival parties (Liberal Democrats, UKIP, and the Labour parties) all resigned.

Meanwhile the situation in Greece continues to slowly boil in the background. The country made their €200 million payment to the International Monetary Fund. Now they have a €780 million payment coming up on May 12th. Greece continues to defy its creditors who are pushing for the country to cut its pensions and lay off workers as conditions for additional financial aid.

Looking East there were headlines in Japan that the country's debt hit a new record of 1.053 quadrillion yen. Odds of them paying that back are close to zero. Meanwhile the country's government is spending huge amounts of money on their own QE program that includes buying both domestic and foreign bonds and stocks.

China's HSBC services PMI improved from 52.3 to 52.9 but that was actually below expectations. Numbers above 50.0 suggest growth. The Chinese stock market experienced some volatility last week as investors reacted to new rules about tighter margin requirements for trading.

Asian markets are likely to rally on Monday as investors react to news that the Chinese central bank has cuts its interest rates. The People's Bank of China moved their rate to a new four-year low with another 25 basis point reduction. This is the third cut in six months as they try and stimulate their economy out of the slowest growth in years.

Major Indices:

The S&P 500's +1.34% rally on Friday pushed the index to a +0.37% gain for the week. Year to date the index is now up +2.7%. It's less than two points from a new all-time closing high and less than ten points from a new all-time intraday high.

The 2,120 level is resistance but I'd like to see a close above 2,125 before calling it a breakout. If the current bounce fails then we can look for potential support in the 2,040-2,070 area. The simple 200-dma could offer additional support near 2,030.

The fear of missing out (FOMO) could fuel another big rally if the S&P 500 can just break free of the 2,120 area.

chart of the S&P 500 index:

The NASDAQ composite rebounded from about 115 points from Wednesday's intraday low near 4,888. Yet in spite of this big rebound it still posted a loss for the week. Year to date the NASDAQ is still outperforming with a +5.4% gain.

Gaps tend to get filled so we should not be surprised if the NASDAQ dips back into the 4,950-4,960 range. Thus far this index continues to trade with a bullish trend of higher lows and higher highs.

chart of the NASDAQ Composite index:

The small cap Russell 2000 index ($RUT) still looks vulnerable after its big breakdown of the trend line of higher lows (see chart). This index spent last week churning sideways in the 1,210-1,240 range. Friday's +0.74% bounce pushed it to a +0.5% gain on the week. Year to date it's only up +2.3%.

If the market rolls over then we should look for the $RUT to dip toward support near 1,180 or 1,200. On the other hand, if the large caps can breakout higher they could drag the small caps with them. The $RUT has overhead resistance about every 20 points (1,240; 1,260; 1,280).

chart of the Russell 2000 index

Economic Data & Event Calendar

The pace of economic data slows down this week. The real market mover could be Greece if they fail to make their debt payment on Tuesday.

Believe it or not but Q1 earnings are still going. This week we will hear from several large retailers like (KSS, JWN, DDS, and JCP).

- Monday, May 11 -
Bank of England interest rate decision

- Tuesday, May 12 -
Greek deadline to make a 780 million euro payment

- Wednesday, May 13 -
U.S. Retail Sales (April)
Business Inventory data
Eurozone GDP estimate

- Thursday, April 14 -
Producer Price Index (PPI)

- Friday, May 15 -
New York Empire State fed survey
Industrial production
University of Michigan Consumer Sentiment

Looking Ahead:

Stock market technicians are surprised to see how well the major U.S. indices are performing when so many investors are pulling money out of the market. TrimTabs reported that the month of April saw U.S.-focused equity mutual funds and ETFs suffered $35.8 billion in outflows. Investors have not retreated from U.S. stocks at this pace since October 2008 during the financial crisis. A recent Bank of America Merrill Lynch survey unveiled that U.S. investors have pulled $99 billion out of stocks this year. If Americans are pulling money out of U.S. stocks then who is buying them to keep prices near all-time highs?

Another question to ponder is why were the markets so excited about a jobs report that only showed +223,000 new jobs? That is woefully inadequate. Larry McDonald, the managing director at Societe General, made some interesting observations. The U.S. Federal Reserve has kept interest near zero for six years. The Fed also spent $4 trillion on QE programs. The rest of the world has also launched their own QE programs (amounting to almost $20 trillion). The U.S. population has grown by more than 14 million people in the last six years. Yet the number of full time jobs has fallen from 23 million in 2008 to only 21 million today. Considering all the QE and easy monetary policy to stimulate growth the U.S. economy should be racing.

McDonald has a point. Growth is significantly lower than what it should be, especially considering everything the Federal Reserve has done to try and stimulate growth. Our Q1 GDP growth was +0.2%. That's down from almost +5% in Q3 2014. The current Q2 2015 estimate is about +0.8%. What happens if the Q1 GDP estimate is revised negative? I suspect if Q1 is revised into negative territory that odds of a Fed rate hike are pushed out into 2016. The next U.S. GDP estimate is May 29th.

Of course it's good to remember that bull markets are always climbing the wall of worry. It's been six years from the bear market low and stocks have overcome wave after wave of worries. The S&P 500 has gone more than 1,300 days without a -10% correction. The average bull market lasts about 165 weeks. The current bull market is 321 weeks old and it's still going.

I suspect the path of least resistance is still higher. Pre-election year summers don't have a great record but that doesn't mean stocks can't post gains. My biggest worry is Greece. If they don't make their debt payment on Tuesday, May 12th, it's going to generate some volatility as investors try to price in the ramifications.

~ James