The stock market spent most of last week in recovery mode, especially after an ugly start on Monday morning (July 27th). That was thanks to another crash in the Chinese Shanghai stock market. Last Monday the Shanghai index plunged -8.5% for its biggest one-day drop in more than eight years. To put that into perspective, Art Cashin, the Director of Floor Operations for UBS Financial Services, said the Shanghai's drop was the equivalent of the Dow Industrials falling -1,485 points in a single day.

Fortunately traders were in a buy-the-dip mood on Tuesday and the U.S. market delivered a three-day bounce. All the major indices managed gains for the week. Transports delivered a big bounce with a +3.9% gain. Housing stocks performed even better with a +4.0% rally. Crude oil continued to sink with oil falling -2.7% for the week to $46.86 a barrel. It was the fifth weekly decline for oil. The commodity is down -21% for the month of July, the biggest one-month drop since 2008.

Economic Data

We had a lot of economic data to digest last week. Pending home sales fell -1.8% in June when analysts were expecting a +1% gain. The Case-Shiller 20-city Home Price index rose +4.4% in May. That is a less than expected but it follows a +5% rise the prior month.

Consumer sentiment is slipping and this is potentially negative for the economy. The Conference Board's Consumer Confidence Index fell to a 10-month low with a drop to 90.9 in July. June's reading was adjusted from 101.4 to 99.8. The University of Michigan's Consumer Sentiment survey was also revised lower with the final July reading adjusted from 93.3 to 93.1. That's down from June's 96.1, which was a six-month high.

Durable goods orders rose +3.4% in June, which was above expectations. The Chicago PMI also came in better than expected with a rise from 49.4 in June to 54.7 in July. This is the first rise in three months and puts the Chicago PMI back into positive territory (above 50.0).

The Commerce Department delivered a mixed outlook on U.S. GDP growth. They revised Q1 growth higher from negative -0.2 to +0.6%. Yet Q2 growth was adjusted to +2.3%, which was less than expected. That puts the 2015 first half growth at +1.5%.

The Employment Cost Index (ECI) made headlines on Friday. This measures civilian employee compensations. The first quarter saw the ECI rise +0.7%. Economists were expecting Q2 to rise +0.6%. Instead the Q2 number was only +0.2%. That's the lowest reading on record going back 33 years. The lack of wage growth could be viewed as another factor that might delay the Federal Reserve from raising rates in September.

Overseas Economic Data

Looking at last week's economic data overseas we're going to turn first turn East. Japan reported their household spending in June plunged -3.0% for the month. That's down from +2.4% the prior month and down -2.0% from a year ago. Retail sales in June were also below down with a drop from +3.0% to +0.9%. In positive news Japan said their industrial production for June rose +0.8%, which was better than expected and a significant improvement from last month's -2.1%. Their construction orders for June surged +15.4%.

We did not see a lot of economic data out of China. Investors were focused on the Chinese stock market instead. As I mentioned earlier last Monday was painful with a -8.5% plunge. There were 75 declining stocks for every 1 advancing stocks. It probably would have been worse but hundreds of stocks didn't even open for trading on Monday. Supposedly the culprit behind the sell-off was new worries that the government's support for the market may not be as strong as promised. The sell-off continued on Tuesday with a -5% plunge in the Shanghai index but a bounce narrowed Tuesday's loss to -1.7% by the closing bell. The Chinese market rebound +3.4% on Wednesday but this was followed by a -2.2% drop on Thursday and a -1.1% decline on Friday.

The Eurozone reported their July CPI rose +0.2%. That was in-line with expectations. Their core-CPI was up +1.0%. Eurozone unemployment was unchanged at 11.1%. Spain reported a mixed bag of results with retail sales for June coming in below estimates at +2.3%. Spain's Q2 GDP growth was +1.0% quarter over quarter and +3.1% year over year.

Germany reported their retail sales for June fell -2.3%. That was significantly below expectations. French consumer spending was also below estimates at +0.4% for the month.

The situation with Greece continues to simmer in the background. The country's leaders have restarted negations with the Troika (EU, ECB, and IMF) over its third bailout since 2010. A recent Reuters article suggested Greece might ask for an initial 24 billion euros to support its banks and pay its upcoming debt payments. Unofficially some EU leaders said the talks are off to a good start. However, by the end of the week the IMF was putting up resistance. News reports on Friday suggested the IMF might pullout of Greece debt talks if they do not include debt relief (debt forgiveness), which is something the EU leaders claim cannot be done since it goes against EU treaties. A Greek newspaper said leaders hope to conclude talks by mid August.

Major Indices:

The S&P 500 index managed a +1.16% gain for the week and a +2.0% gain for the month of July. Yet the big cap index remains stuck in its 2,040-2,130 trading range. Year to date the S&P 500 is up +2.2%.

Last week saw the S&P 500 test technical support at its simple 200-dma and bounce. If we're going to trade technicals then Friday's decline has produced a small bearish engulfing candlestick reversal pattern, which would suggest a decline in the week ahead.

The only levels we need to watch at the moment is the bottom of the range at 2040 and resistance near 2130.

chart of the S&P 500 index:

The NASDAQ composite bounced off technical support near its rising 100-dma and ended the week with a +0.78% gain. The index is up +2.8% for the month of July and year to date it is up +8.3%.

The 5,160 area could be short-term resistance. Above that the July highs near 5,230 are resistance. I'd still look for support at 5,00 and 4,900.

chart of the NASDAQ Composite index:

The small cap Russell 2000 index fell to new five-month lows with an intraday spike down on Tuesday morning. Fortunately the index reversed and is now up four days in a row. The $RUT managed a +1.0% gain for the week. I'm worried that the index is currently in a new trend of lower highs and lower lows that started with the reversal from its June peak.

If I'm right about the new trend then the 1,250-1,255 area should be short-term resistance. Support could be around the 1,200 area.

Year to date the $RUT is up +2.8%.

chart of the Russell 2000 index

Economic Data & Event Calendar

It's a brand new month and that means lots of economic data. We'll get the ISM and ISM services indices. The ADP employment number will hint at the BLS jobs report on Friday. Analysts are estimating +215,000 jobs for the ADP report and +220,000 for the government's nonfarm payroll data.

- Monday, August 03 -
Eurozone manufacturing PMI
Personal Income & Spending
ISM index
Auto and truck sales

- Tuesday, August 04 -
Factory Orders

- Wednesday, August 05 -
Eurozone services PMI
ADP Employment Change Report
ISM Services index

- Thursday, August 06 -
Bank of England interest rate meeting

- Friday, August 07 -
Bank of Japan meeting
Nonfarm payrolls (jobs) report
Unemployment rate

Additional dates to be aware of:

Sept. 7th - Markets closed for Labor Day holiday
Sept. 17th - FOMC meeting, policy update, economic forecasts
Sept. 17th - Fed Chairman Yellen press conference

Looking Ahead:

As we look at the week ahead all eyes will be on the nonfarm payrolls report due out Friday morning. Analysts want to see the latest jobs number in hopes of discerning if the Fed will raise rates in September or postpone the next rate hike out to December or even wait until 2016. If the jobs data is significantly above estimates then suddenly traders will worry about a rate hike in September.

There is no FOMC meeting in August and Federal Reserve Chairman Janet Yellen is not going to attend annual economic symposium in Jackson Hole, Wyoming, this year. The symposium is sponsored by the Federal Reserve Bank of Kansas City and runs August 27-29th. This could produce a vacuum of information between now and the next FOMC meeting in September.

We are still in the middle of Q2 earnings season although the worst is behind us. After almost 1,300 companies reporting last week we'll see nearly 1,000 companies report earnings this week. While the general consensus on earnings seems to be not as bad as expected we are still seeing plenty of individual stocks implode on their results.

I mentioned last week that the calendar is not in the bulls' favor. August and September are typically the worst two months of the year for stocks. According to the Stock Trader's Almanac the month of August, since 1950, sees the S&P 500 index trade down -0.1%. Yet the last five years have seen the S&P 500 deliver an average decline of -2.5% in August.

Another negative for the market is market breadth. We have mentioned this issue before. The stock market's strength has been fueled by fewer and fewer stocks. Only a handful of big caps account for the market's gain because the averages are market-cap weighted. According to Oppenheimer Asset Management's technician Ari Wald, the market breadth hasn't been this poor since 2007. Yet according to Bloomberg, market breadth hasn't been this bad in almost 15 years. If the handful of stocks that have been supporting the market start to rollover we could see the broader averages accelerate to the downside.

Lately the investor sentiment numbers have been oscillating back and forth but last week they took a turn for the worse. The latest survey of the American Association of Individual Investors (AAII) saw bullish sentiment collapse from 32.5% down to 21.1%. Bearish sentiment surged to 40.7%. This is a two-year high for bearish sentiment. Meanwhile bullish sentiment just marked its 18th week in a row below the long-term average of 38.2%. It's the longest streak below average since July 2012.

Now you could argue that this surge in bearish sentiment is actually a contrarian indicator suggesting we're near a potential market bottom. Another interesting signal could be the surge in short interest. According to research done by Markit the amount of short interest in the S&P 500 stocks hit two and a half year highs. If stocks were to breakout higher this could be fuel for a short squeeze.

I am reiterating my comments from last week. The S&P 500 index remains stuck in a major trading range. We're facing the two worst months of the year for stocks. We could see anxiety over a Fed rate hike in September rise over the next six weeks. I would not be in a rush to launch new long-term bullish positions. However, if we see a close above 2,135 on the S&P 500, then my market bias will be a lot more optimistic.

~ James