Last week I suggested it was full speed ahead for stocks. Unfortunately someone forgot to tell the market. Big cap U.S. stocks rallied on Monday (May 18th) and the S&P 500 index broke out to new highs. That was about it for market movement. The rest of the week saw stocks drift sideways. called it the slowest week of the year. The S&P 500 traded inside a 15-point range for the last five trading days.

We discussed the bearish divergence between the Dow Industrials and the Dow Transports last weekend. The transports accelerated lower thanks to a very sharp sell-off in the airline stocks. Railroads did not perform very well either. The transportation average fell -2.29% last week, which pushes the year to date loss to -7.19%. Thankfully this weakness was offset by relative strength in financials (+1.3%), semiconductors (+1.5%), and the biotechs, which rallied +3.3% last week.

The bond market tagged a new relative low and bounced. The yield on the U.S. ten-year bond ended the week at 2.2%. Yields on a German 10-year bond are 0.6%. Meanwhile the U.S. dollar surged. After falling five weeks in a row the U.S. dollar produced a big bounce and that sent commodities lower. Gold and silver both posted losses and crude oil had a rough time last week.

Trading volume began to evaporate as we got closer and closer to the long, holiday weekend. Investors were essentially on the sidelines all week. There was the potential for headlines out of Europe (regarding Greece) on Friday. There was Federal Reserve President Janet Yellen's speech on Friday. Both could have been reasons for traders to just sit and wait. Of course it's natural for traders to take positions off ahead of a long weekend for fear of what new headlines the weekend might bring.

Economic Data

There were multiple data points on the residential real estate market last week. Housing starts surged +20% in April to a 1.135 million pace. That's up from March's 926,000 reading. We haven't seen housing starts this strong since late 2007. They haven't jumped this much, +20% in one month, in almost 25 years. The market's first reaction was to sell the news. If the housing sector gets too hot it could be seen as a reason for the Federal Reserve to raise rates sooner rather than later.

The funny thing is that the NAHB housing market index, which is essentially a sentiment or confidence survey among the homebuilders, actually fell from 56 to 54. Analysts were expecting a rise to 58. The existing home sales figures fell -3.3% in April to an annual pace of 5.04 million homes.

In other news, the Philly fed business outlook survey fell from 7.5 in April to 6.7 in May. The consumer price index (CPI) rose +0.1% in April. The core-CPI, which excludes food and energy costs, surged +0.3%. This was the biggest rise in the core-CPI since January 2013. The annual pace (trailing 12 months) for the core-CPI is +1.8% and that's nearing the Federal Reserve's 2.0% target.

The FOMC minutes from the prior meeting was a non-event. Some of the Fed members expressed concern that the seasonal weakness in Q1 might bleed over into Q2. This reaffirmed the common belief there will be no rate hike in June.

The big story on Friday was Fed Chairman Janet Yellen's speech. In summary, Yellen wants to raise rates but she's still worried the U.S. economy isn't ready yet. The Fed wants to see steady improvement in the labor market and feel confident that inflation will hit their 2% target. The Fed is forecasting U.S. GDP growth to be in the 2.0-2.5% range for the foreseeable future and that's lower than they would like before raising rates, which could slow the economy. The Atlanta Fed is forecasting Q2 GDP growth of just +0.7%.

No one expects the Fed to raise rates at the June meeting. There is a possibility they could do it at the July meeting but most economists are expecting the Fed to raise rates once in September and then they're done for the year. Quite a few analysts do not expect the Fed to raise rates at all this year.

FYI: The Fed also has meetings scheduled in October and December.

Overseas Economic Data

Japan released a lot of data last week. Their March core machinery orders were up +2.9% for the month and up +2.6% versus a year ago. Japan's industrial produce was down -0.8% in March, which was worse than expected. Japan's May Flash manufacturing PMI improved from 49.9 to 50.9, which was also better than estimated. The country's Q1 GDP estimate came in at +0.6%. That was above expectations and boosted its year over year growth to +2.4%. It looks like their QE program might be working. The Bank of Japan left their monetary policy unchanged with its interest rate at 0.1%. The BoJ also upgraded their economic outlook for the first time in two years.

China continues to struggle with its economic slowdown. Their Flash HSBC manufacturing PMI reading for May improved from 48.9 to 49.91 but that was below expectations and the third month in a row in contraction territory (below 50.0). Their China Flash manufacturing outlook index dropped to a 13-month low at 48.4 in May. If you recall China's central bank just recently cut rates for the third time in six months and that usually takes a while to filter through the economy. Disappointing economic data has not stopped the rally in Chinese stocks. Their main market index hit new multi-year highs last week.

European finance leaders are still worried about growth in the region but they're turning more optimistic. Germany's Flash manufacturing PMI reading for May was a disappointment with a drop from 52.1 to 51.4, which was below expectations.

Benoit Coeure, a member of the European Central Bank, moved the market on Tuesday. Coeure said that the ECB might "frontload" their QE purchases in June to avoid a liquidity slowdown later this summer. This sparked a temporary rally in bonds and pushed the euro currency lower.

On Friday ECB President Mario Draghi delivered an optimistic viewpoint. Essentially he said that the Eurozone's economic prospects look better now than they have in the past seven years.

We also made it another week without the Greek time bomb going off. Greek Prime Minister Alexis Tsipras met with German Chancellor Angela Merkel and French President Francois Hollande for high-level negotiations. Everyone knows that Greece is out of money and will not be able to make their next big debt payment to the IMF on June 5th. That's only two weeks away!

Major Indices:

The S&P 500 index eked out a +0.16% gain for the week. Year to date it is up +3.2%. The breakout past resistance at 2,120 is bullish but there hasn't been any follow through higher. On the plus side the path of least resistance is still higher.

I'd look for support near 2,080 on any market drop. Below that the 2,040 level should be underpinned by the rising 200-dma.

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

chart of the S&P 500 index:

The NASDAQ is up two weeks in a row thanks to a +0.8% gain last week. You can see on the chart how the index struggled with resistance near the 5,100 level. If this rally continues the 11-month trend line of higher highs is overhead resistance. On the downside the 5,000 mark and the 4,900 level should offer some support. Year to date the NASDAQ composite is up +7.5%.

chart of the NASDAQ Composite index:

The small cap Russell 2000 index delivered a disappointing performance. Monday's bullish breakout past its 50-dma did not see any follow through higher. The $RUT struggled with the 1,260 level all week long. It ended the week with a +0.6% gain and that boosts the current streak to three up weeks in a row.

The 1,260 and 1,280 levels are resistance. If we are lucky the 1,240 level will be support. If the $RUT breaks 1,240 again I wouldn't be surprised to see a drop toward the 1,200 level.

chart of the Russell 2000 index

Economic Data & Event Calendar

The U.S. market is closed on Monday for the Memorial Day holiday. That leaves just four trading days left for the month of May. Most of this week's economic reports will come out on Tuesday. I don't expect any of them to be market moving.

On Friday we'll get our second estimate on Q1 GDP growth. The first estimate was +0.25% but analysts are expecting that to be revised lower to -0.8%. That is assuming the U.S. Bureau of Economic Analysis doesn't change the way we calculate GDP. They have been talking about boosting their seasonal adjustments, which would likely boost the estimate high enough to avoid a negative GDP print.

- Monday, May 25 -
U.S. market closed for Memorial Day

- Tuesday, May 26 -
Durable Goods
New Home Sales
Case-Shiller 20-city home price index
Richmond Fed manufacturing survey
Texas Fed manufacturing survey
Consumer confidence

- Wednesday, May 27 -
(nothing significant)

- Thursday, April 28 -
Pending home sales

- Friday, May 29 -
Q1 U.S. GDP (2nd) estimate
Consumer sentiment

Additional Events to be aware of:

June 5th - OPEC meeting

Looking Ahead:

Looking at the big picture I don't see any real changes from last weekend. The S&P 500 is poised to move higher. Investors are just searching for a catalyst. It's entirely possible that the longer we stay at new highs that money managers will get desperate and start throwing money at the winners to boost their performance. The first half of the year is going to be over in a month.

Last week I talked about the lack of bullish sentiment. That trend continues. Bullish sentiment has fallen for the fifth week in a row. The AAII investor sentiment survey saw bulls drop -1.5% to 25.2%. Bears fell -1.4% to 25.05. That means half (almost 50%) of investors surveyed are neutral on the market. A normal reading is only 30.5% of investors are neutral.

A recent poll by Merrill Lynch corroborates this outlook. They found that money managers have more cash sitting on the sidelines that any time since mid 2009. Imagine that. We are in a bull market with the S&P 500 at a new record high and money managers are afraid to put new money into stocks. Hopefully they are just waiting to buy the next dip.

Charles Rotbiut, the AAII editor, did some research. He found that when neutral sentiment is high for an extended period of time it normally precedes a market rally. Based on his research, 80% of the time the S&P 500 index is higher six months and twelve months down the road.

We all know that a bull market can climb the wall of worry. Here are a few bricks in the wall. The ECB's QE will likely push the euro lower and that's going to boost the dollar. A strong dollar is going to hurt big cap company earnings since they do so much business overseas.

The small cap index is underperforming and may have just formed a new lower high. As a counter-point the S&P 500 midcap ETF (MDY) is trading near all-time highs and mirroring the big caps.

One brick in the wall of worry that is really concerning is the lack of consumer spending. JP Morgan's Senior Global Economist Joseph Lupton believes "something has gone wrong with the global consumer." Lupton noted that U.S. retail sales have missed expectations five months in a row. He also points out that slower consumer spending has turned into a worldwide phenomenon. He questions whether this is just a temporary "soft patch" or a longer-term challenge. (read more on the topic here.)

I suspect that the holiday-shortened week in front of us could be quiet. It is the week after that worries me. Greece and its creditors are still at an impasse but that could change rapidly. U.S. and European stock and bond markets could turn volatile the closer we get to Greece's June 5th deadline. Greece has already warned they can't afford to make this payment without help. (Greece says it will default).

Enough about Greece! It's the weekend and a long weekend at that. Be prepared for a lot more traffic. AAA said that gasoline prices this Memorial Day weekend are the cheapest this time of year since 2010. The average price for a gallon of gas is $2.73. That's almost a $1.00 cheaper than a year ago. AAA estimates that Americans have already saved $50 billion on gas this year. They are also estimating that car traffic this holiday weekend will hit 10-year highs.

Have a wonderful Memorial Day weekend and thank a veteran for their service!

~ James

"Our debt to the heroic men and valiant women in the service of our country can never be repaid. They have earned our undying gratitude. America will never forget their sacrifices."
– President Harry S. Truman