The tug of war between bulls and bears continued last week. Lack of follow through on the prior Friday's job-report-inspired rally made it look like the bears might take control. Fortunately buyers stepped back into the market after a three-day decline. The S&P 500 ended the week at a new record high above resistance near 2,120. Both the big cap S&P 500 and the small cap Russell 2000 are up two weeks in a row. The biggest market-moving event was the huge moves in the bond market both domestically and in Europe. A widespread sell-off in bonds definitely had equity investors spooked for a few days.

The U.S. bond market fell to five-month lows before bouncing. Yields on the 30-year U.S. note traded above 3.0% for the first time since December 2014. The 10-year yield hit 2.33% midweek. On Friday it settled at 2.1%. In addition to a weak bond market the U.S. dollar continued to sink and marked its fifth weekly loss in a row. We haven't seen a move this steep in a long time. Normally a weak dollar is bullish for commodities. Precious metals like gold and silver definitely rallied on the dollar weakness. Gold rose +3.0% and silver rallied +6.5% last week. Oddly enough crude oil rose +0.9%. After a +25% bounce off crude oil's low in March the rally in oil looks tired. Oil stocks and oil service stocks underperformed the broader market with declines last week.

Chart of the German 10-year bond yield

Chart of the U.S. 10-year bond yield

Chart of the U.S. bond market ETF

Chart of the U.S. dollar and the Euro

Economic Data

Another challenge for the market was a new parade of disappointing economic data. There seems to be a growing mound of evidence the U.S. economy is slowing down. Investors seem to believe that this will keep the Federal Reserve from raising rates any time soon and thus bullish for stocks.

U.S. retail sales for March was revised higher from +0.9% to +1.1% but April's retail sales number was flat (+0%). This weakness was due to a slowdown in auto sales. The latest data saw the pace of automobile sales in the U.S. drop from 17.1 million to 16.5 million seasonally adjusted annual rate.

Consumer sentiment numbers were a shocker! The University of Michigan Consumer Sentiment Index fell from 95.9 in April to 88.6 in May. Economists were expecting it to be unchanged at 95.9. This was a huge miss and a new six-month low (last October this index was 86.9). Analysts were quick to blame part of the problem on rising gasoline prices. Looking at the internals the present conditions component fell from 107.0 to 99.8. The expectations component of the survey dropped from 88.8 to 81.5.

Speaking of the consumer there were a number of retail-industry related earnings reports last week. BusinessInsider ran an article on Macy's and the state of the American consumer. Macy's (M) missed Wall Street estimates on both the top and bottom line. Management blamed lousy weather and steeper competition for their results. They also feel that the consumer has failed to "bounce back" and they are just not spending like they used to. In the article BusinessInsider noted that "every group surveyed by the Federal Reserve Board had a lower mean income in 2013 than the did in 2007." This would suggest that consumers' purchasing power is just not keeping up. Yet in contract to Macy's concerns about the consumer its rival Kohl's (KSS) thinks the consumer is fine. KSS reported earnings last week too. KSS beat estimates on the bottom line but their stock was crushed as the company missed analysts' sales estimates. Plus their comparable store sales were significantly weaker than expected. KSS management doesn't think there is anything wrong with the consumer. Overall they believe the retail environment is better than last year.

U.S. industrial production was another disappointment. April's reading was -0.3%. That's an improvement from March's -0.6% but analysts were expecting April to be +0.1%. Capacity utilization declined to a new 12-month low of 78.2%. April was the fifth month in a row that industrial production has declined. The slowdown in the oil and gas drilling industry might be the main culprit behind the weakness.

We also got a look at the wholesales producer price index. March's +0.2% gain in the PPI was reversed with a -0.4% decline in April. Food prices accelerated lower with a -0.9% drop in April after a -0.8% loss in March. The core PPI, which excludes food and energy, rose +0.2%.

The New York Empire State Manufacturing Survey did see some improvement. May's number was +3.1 compared to April's -1.2. Readings above 0.0 are bullish but analysts were expecting May to be 5.0.

The labor market continues to improve. The weekly initial jobless claims fell to 264,000. This is the third week in a row it has been under 270,000. The four-week moving average has fallen to 271,750, which is a new 15-year low.

Overseas Economic Data

Economists were expecting Eurozone Q1 GDP to see a +0.5% improvement over Q4. The current estimate came in at +0.4%. Year over year 2015 Q1 GDP for the Eurozone rose +1.0%. Germany's quarter-over-quarter Q1 GDP growth was +0.3%, which was a little bit below estimates. France's Q1 GDP rose +0.6% while Italy's improved +0.3%. The Eurozone's industrial production number for March fell -0.3%, which was a sharp drop from the prior month's +1.0% gain.

The latest news on Greece saw the country make its €750 million payment to the International Monetary Fund last week but only by using its reserves held at the IMF. As of this weekend Greece's Syriza government refuses to back down from its pledge to end austerity. The next meeting with Eurogroup members is May 21-22. There's going to be another round of hard-line negotiating with Greece as the country quickly runs out of money.

According to a recent Bloomberg article "more than 110 days of talks between Greece and its creditors have failed to produce an agreement to unlock additional aid from a 240 billion-euro ($275 million) bailout." Greece's creditor's are refusing to lend the country any more aid without new reforms. Both sides are talking about how this is the end game. Someone has to cave in. ING Germany Chief Economist Carsten Brzeski said, "It's either a third bailout backage, or it's a Grexit, no matter how you look at it." He does not see any alternatives. Greece has some huge debt payments coming up in the next few months (starting with a big one on June 5th). Without a compromise they are not expected to make that payment.

European Central Bank President Mario Draghi was making headline last week. There had been some growing speculation that the ECB's QE program, only a couple of months old, was already successful. There was speculation that maybe they should end their QE program early. Draghi put that rumor to rest. He said the €1 trillion asset-buying program will run its course and it's not supposed to end until September 2016. That's bullish for European stocks.

China made headlines early last week (actually last weekend) when their People's Bank of China cut rates again. It was their third rate cut in the last six months. The government is desperately trying to stimulate their economy as the slowdown worsens. Their steel consumption fell -3.4% last year, which was the first decline in thirty years. Morgan Stanley warned that after China's recent surge in national debt has set the country up for a potential crisis. The firm's research suggests that when a country's debt surges over a five-year period the next five years there is a 70% chance of a financial crisis and a 100% chance of a major economic slowdown.

Major Indices:

The S&P 500 index recovered from its midweek lows and finally broke through resistance at the 2,120 level. The index gained +0.31% for the week. This pushed its 2015 gain to +3.0%.

I would be a little bit hesitant to call this a breakout. Yes, the index is technically above resistance but it's less than three points above the 2,120 level and still below its intraday high from April 27th (2,125).

The pattern of resistance every 20 points would suggest 2,140 is the next resistance level for the S&P 500. Short-term support is probably in the 2,080 region.

Five-Day chart of the S&P 500 index:

chart of the S&P 500 index:

The NASDAQ's bounce last week (+0.9%) has broken the two-week trend of lower highs. If this rally continues the overhead levels to watch are 5,100 and 5,150. The 5,000 level has not done a very good job acting like support so I wouldn't count on it now.

Year to date the NASDAQ is outperforming with a +6.2% gain.

chart of the NASDAQ Composite index:

The small cap Russell 2000 index bounced near 1,220 on Tuesday and ended the week with a +0.73% gain. Like the S&P 500 the $RUT is up two weeks in a row. Unlike the S&P 500 the $RUT is not at a new all-time high. This small cap index has stalled just below its simple 50-dma.

A breakout higher could signal a run toward its April highs in the 1,270-1,280 region. If the $RUT rolls over then odds are good we could see it drop toward the 1,200 level.

chart of the Russell 2000 index

Economic Data & Event Calendar

This week we will get more data on the U.S. housing market. The big event could be the FOMC minutes from the last meeting. Traders are desperate for any clues on when the Fed might raise rates next.

- Monday, May 18 -
NAHB housing market index

- Tuesday, May 19 -
Housing starts and building permits for April

- Wednesday, May 20 -
FOMC minutes

- Thursday, April 21 -
Existing home sales
Philadelphia Fed survey

- Friday, May 22 -
Consumer Price Index (CPI)
Bank of Japan interest rate decision

Additional Events to be aware of:

May 29th - next Q1 GDP estimate

Looking Ahead:

Looking ahead to next week you might hear more about a divergence between the Dow Industrial Average and the Dow Transportation Average. The Industrial average is on the verge of breaking out to new record highs while the transportation average is bouncing from support near six-month lows.

Dow Theory suggest we can't have a sustained market rally without participation in the transport stocks. There might be some truth to that. If we are seeing fewer goods being moved by trucks, trains, and ships then it would suggest a weaker economy. We should also consider that this Dow Theory is about 100 years old. Today were are much more of a services economy. That doesn't mean the issue of fewer goods being shipped isn't real. It's just that the transports are a smaller portion of the economy than they were a hundred years ago.

Seeing the transports breakdown below support would still be psychologically bad for the market but it doesn't spell the end of the bull market. It's just something to keep an eye on. The big bounce in crude oil over the last two months could have put some pressure on the transport stocks. Plus the railroads are suffering with less demand from the energy sector to transport materials and drilling equipment.

The idea that a slowdown in the transportation sector signals an economic downturn is still worth considering. We have seen economic data in the U.S. deteriorate over the last few months. Economists have recently started downgrading their outlook on the economy again. A recent Bloomberg survey shows that consensus estimate has fallen from +2.7% growth in the second quarter down to +2.3%. I want to remind readers that the Atlanta Federal Reserve is only forecasting +0.7% growth in the second quarter.

Here's another interesting contrarian indicator. Normally a bull market tops out when everyone is overwhelmingly bullish. The crowd is so enthusiastic that stocks accelerate higher at an unsustainable pace. The folks at Bespoke Investment Group have been analyzing the AAII investor sentiment data. Bullish sentiment fell to 26.7%. This is the tenth week in a row that bullish sentiment has been under the long-term bull market average. It's also the tenth week out of the last twelve that sentiment has declined. A quick translation would suggest we are nowhere close to any kind of major top in the stock market based on current investor sentiment. The most hated bull market in history marches on.

Last week I suggested the path of least resistance was higher. That's still the case. Both the big cap indices, the Dow Industrials and the S&P 500, look pretty bullish. The sell-off in the small cap Russell index that occurred three weeks ago may have been exactly what the Russell 2K needed to adjust from overbought conditions.

I almost hate to say it for fear of jinxing the rally but it looks like full speed ahead for the bull market. The only iceberg in our path is the Greece situation. May 20th through the 22nd will produce a lot of headlines as the game of brinkmanship hits epic proportions between Greece and its creditors in the Eurogroup.

~ James