The stock market is having a hard time picking a direction. Two weeks ago, during the Thanksgiving week, the S&P 500 index was virtually flat with a one-point gain for the week. This past week saw volatility spike sharply with big moves both direction and yet the S&P 500 gained less than two points for the week - again, virtually flat.

Last Monday's ten-point decline in the S&P 500 almost erased the index's gain for the month of November. Normally the first week of December has an upward bias and Tuesday's market rally (December 1st) seemed to confirm the seasonal trend. Unfortunately the very next day was the terrorist attack in San Bernardino, California. The market trended down as details of the horrific act were unveiled in the news on Wednesday afternoon.

European Central Bank

The stock market sell-off intensified on Thursday as traders reacted to the ECB meeting and their announcement of new stimulus measures. ECB President Mario Draghi has been promising "whatever it takes" for the last couple of years. He has been hinting at new stimulus at the ECB's December meeting for weeks.

The markets were unhappy to see that the ECB left their main refinancing interest rate unchanged at 0.05% and left their marginal lending facility rate unchanged at 0.3%. Many were expecting the ECB to raise their monthly QE purchases from the current level of 60 billion euros a month. That was left unchanged as well. What the ECB did change was their deposit facility interest rate, which was adjusted from -0.2% to -0.3%. They also extended the time frame of their QE program an extra six months to March 2017.

This did not communicate a "whatever it takes" attitude to investors and stocks sold off sharply. The next day (Friday) Mario Draghi was speaking at another engagement and used it as a platform to soothe the markets by saying there is "no limit on using ECB tools... quickly and without delay." A moderator at the event on Friday actually asked Draghi if his new comments were aimed at the stock market and offset Thursday's sell-off. Draghi replied, "not really, (slight pause) well of course." The audience laughed and Wall Street rallied. The combination of Draghi's dovish tone and a better than expected jobs report helped fuel the big rally on Friday. We'll talk about the jobs number in a moment.

OPEC Meeting

Another event on Friday was final 2015 meeting of the Organization of the Petroleum Exporting Countries (OPEC). Currently OPEC has a daily quota of 30.0 million barrels of oil a day. Unfortunately, they are notorious cheaters at ignoring their own quotas and the cartel is producing 31.5 million barrels a day. There were some initial reports that OPEC had agreed to raising their daily production quota to 31.5 mmbpd but that was incorrect. Their official statement left quotas unchanged at 30.0 mmbpd.

Most of OPEC is caught in a trap. They depend on their oil exports for government revenue. All of them know that if they significantly cut production that it would help lift oil prices but no one wants to cut production and trust that their cartel members would honor the pledge and also cut. They're stuck in a "prisoner's dilemma" because they can't trust their "allies" to do the right thing. Each country is too dependent on their oil revenues. So instead most of them are pumping as much oil as they can to try and make up for lost revenue with higher volume.

It does not help OPEC that Russia, who is not a member, also needs as much revenue as they can from their oil and gas production. Plus, if oil prices actually went up, then the nimble U.S. oil industry would be able to boost production to take advantage of higher prices. OPEC faces another challenge with Iraq and Libya expected to raise production in 2016. Plus, if the Iran sanctions are lifted, then Iran plans to significantly boost their oil exports.

All of this is forecasting additional oil supply to an already well-supplied market. Crude oil sank -2.4% on Friday to close near round-number support at $40 a barrel. For the week crude oil lost -3.9%. This weighed heavily on oil and energy stocks, which fell -3.4% for the week. Oil service stocks plunged -3.8% for the week.

Economic Data

There was a lot of economic data to digest last week. The Chicago Purchasing Managers index (PMI) dropped from 56.2 in October to 48.7 in November. This foreshadowed a decline in the national ISM manufacturing index on Tuesday, which fell from 50.4 to 48.6. Numbers below 50.0 suggest economic contraction and recession. November's ISM marks the first month in contraction in about three years. Meanwhile the ISM services index came in worse than expected with a drop from 59.1 to 55.9. Services are a larger part of the U.S. economy and the services index has been above 50.0 for almost six years in a row.

The ADP National Employment Report on Wednesday came in better than expected. The October reading was revised from +182,000 to +196,000 private-sector jobs. The November reading was +217K when analysts were expecting a number in the 180-190K range. This portended a strong monthly jobs numbers from the BLS on Friday morning.

Economists were expecting +200,000 new jobs in the monthly nonfarm payroll report. The government revised the October jobs number from +271,000 to +298,000, the highest reading since last December. Meanwhile the November jobs number came in above estimates at +211,000 jobs. The three-month moving average rose to +218K, which is good enough for the Federal Reserve to raise rates later this month. The unemployment rate was unchanged at 5.0%.

Speaking of the Fed, Janet Yellen, the Federal Reserve Chairman, spoke twice last week. Both times she reiterated how the Fed was data dependent but suggested they were on track to raise rates in December. The healthy jobs number virtually guarantees the Fed will raise rates when they meet on December 16th. The funny thing is that most of the "data" is suggesting the U.S. economy is slowing down (see the ISM numbers above). If Yellen does raise rates this month it will be the first time the Fed has raised rates with the manufacturing economy in a recession since 1981.

Overseas Economic Data

There was plenty of economic data overseas as well. The Bank of France downgraded their growth outlook for both 2016 and 2017 and now expects French GDP growth of +1.4% and +1.6%, respectively. Germany said their factory orders for October improved sharply with a jump from -0.7% to +1.8%.

The Eurozone reported their unemployment rate for October improved slightly from 10.8% to 10.7%. Eurozone manufacturing PMI for November was unchanged at 52.8 while their retail PMI fell from 51.3 to 48.5. Services PMI for November inched down from 54.6 to 54.2. Numbers above 50.0 suggest growth.

The Eurozone also reported that inflation at the retail level, the CPI, was up +0.1% in November. Their core-CPI rose +0.9%. Yet inflation at a wholesale level, the PPI, fell -0.3% in October and was down -3.1% year over year. The Eurozone wants to see stronger inflation growth (to avoid deflation).

Looking east we heard that Japan saw a +1.4% jump in their industrial production for October. The country also saw a +1.8% rise in their retail sales for October, which was a significant improvement from September's -0.2%. China's official manufacturing PMI for November slipped from 49.8 to 49.6 while their non-manufacturing PMI inched higher from 53.1 to 53.6. The Caixin manufacturing PMI for November improved slightly from 48.3 to 48.6 and the Caixin services PMI dipped from 52.0 to 51.2. Remember, numbers below 50.0 suggest recession and economic contraction.

Major Indices:

It was a volatile week for the market. The S&P 500 briefly traded above round-number resistance at 2,100 and then reversed lower with a plunge toward technical support at its 50-dma. The huge bounce on Friday saw most of the market rally +2.0% in a single session. This left the S&P 500 with a +0.08% gain for the week (less than 2 points). The index is now up +1.6% for the year.

The S&P 500 now has a declining trend of lower highs but a breakout could signal a run toward its all-time highs near 2,130. Should the bounce fail we can see the technical support at the 50-dma. If that moving average fails the next support level looks like 2,020 or the 2,000 level.

Five Day chart of the S&P 500 index:

Daily chart of the S&P 500 index:

The NASDAQ composite soared nearly 105 points on Friday (+2.0%), which erased most of its Wednesday-Thursday decline. The index managed a +0.29% gain for the week and is now up three weeks in a row. The 5,160-5,170 area remains overhead resistance. A breakout past this level could spark a run toward its all-time highs near 5,232 in July this year. Year to date the index is up +8.5%.

If the NASDAQ fails to see any follow through higher I'm worried a breakdown below the trend of higher lows (see chart) could signal a drop toward 4,900 or lower.

chart of the NASDAQ Composite index:

Small caps had a rough week. The group outperformed the broader market the prior two weeks. Yet last week the Russell 2000 index fell -1.58%. That's after Friday's +1.0% bounce. Year to date the $RUT is down about -1.6%.

I have been warning readers that the 1,200-1,220 zone is overhead resistance. Last week the $RUT's rally failed at 1,205. Fortunately the index still has a bullish trend of higher lows - at least for now. December and January are normally really strong months for the small caps so investors might use this dip as another entry point although Friday's underperformance (+1.0% versus the market's +2.0%) doesn't bode well.

chart of the Russell 2000 index

Economic Data & Event Calendar

The pace of economic data slows down this week. Nothing on the calendar is that market-moving. We only have three and a half weeks left for 2015. The financial media will likely be focused on the Federal Reserve's upcoming meeting on December 15-16th and the pace of interest rate hikes in 2016.

- Monday, December 07 -
Bank of Japan's Governor Haruhiko Kuroda speaks

- Tuesday, December 08 -
China trade data for November
Japan's revised Q3 GDP estimate

- Wednesday, December 09 -
Wholesale inventory data

- Thursday, December 10 -
Bank of England interest rate decision
Swiss National Bank rate decision and quarterly update
Import/Export prices

- Friday, December 11 -
Producer Price Index (PPI)
U.S. Retail Sales for November
Business Inventory data from October
University of Michigan Consumer Sentiment
U.S. Congressional deadline to pass a spending bill

Additional dates to be aware of:

Dec. 16th - FOMC meeting, new forecast
Dec. 16th - Fed Chairman Yellen's press conference
Dec. 24th - Christmas Eve (market closes early)
Dec. 25th - Christmas (market closed)

Looking Ahead:

It was a volatile week for the stock market. The good news is that Friday's bounce reaffirms the bullish trend of higher lows starting from the market's August-September correction. The bad news is that last week's volatility suggests investors remain nervous.

The S&P 500 is relatively flat for the year, only up +1.6% in 2015. Most fund managers have underperformed their benchmarks. Veteran investors would argue that is normal to see funds underperform the broader market but this year has been especially tough. That could mean there will be a big chase for performance between now and yearend. Winning stocks should keep climbing while losers get sold for tax loss purposes.

Overall my market bias is still bullish. History says stocks normally go up in December and there is still no serious alternative to the stock market. Precious metals are in a down trend and trading near multi-year lows. Meanwhile the yield on the ten-year bond is hovering around 2.2%. Investors seem to be interpreting the Fed's (likely) decision to raise rates in December as a vote of confidence in the U.S. economy.

~ James