Stocks and other risk assets ended the week mixed as weaker than expected economic data from China and Europe renewed fears of a global slowdown. As we have been mentioning for weeks, the market is extended to the upside and we would not be surprised to see a nice pullback to shake out the weak/late hands. From our point of view, the major averages confirmed their latest rally attempt on Tuesday 1.3.12 which was Day 9 of their current rally attempt. Since then, stocks have been enjoying a very strong uptrend. The benchmark S&P 500 paused near its 2011 high (~1370) before moving higher and that level should now become support. The next level of support would be the 50 DMA line, then a deeper 5-9% pullback. That would bring the S&P 500 down to 1350-1280. It is important to note that the bulls remain in control of this market as long as the benchmark S&P 500 stays above its 50 DMA line.

Monday-Wednesday’s Action: Pullback Begins

In the U.S., stocks were relatively quiet on Monday as investors digested the prior week’s strong move and the latest round of housing data was released. The National Association of Home Builders/Wells Fargo Housing Market Index held steady at 28 in March. The index is still below the boom/bust level of 50 which separates positive and negative sentiment but is now holding steady at its highest level since June 2007. In other news, AAPL said it will offer a $2.65 dividend and offer a share buy back to help utilize its massive pile of cash. Before Tuesday’s open, futures were down sharply due to renewed fear that China’s red-hot economy may begin to slow. Economic data was light in the U.S. but the news that did come out was mixed. The Commerce Department said housing starts fell -1.1% in February to a seasonally adjusted annual rate of 698,000 units, but building permits vaulted to their highest level in more than 3 years! The Street was looking for housing starts to be at a 700,000-unit annual rate.
Stocks slid on Wednesday after Ben Bernanke said that he would take additional steps to stimulate the economy if conditions worsened. The Mortgage Bankers Association said weekly mortgage applications fell in the middle of March due to a drop in refinancing demand. The National Association of Realtors said home sales slid -0.9% in February to a seasonally adjusted annual rate of 4.59 million and revised January’s reading to 4.63 million. That was the highest level since May 2010.  Equally important, housing stocks continue to act well and for the most part remain above their respective 50 DMA lines.

Thursday & Friday’s Action: China And Europe Slow, U.S. Economy Remains Fines:

Before Thursday’s open, stocks in Europe fell after two weaker-than-expected economic data points from China and Europe were released. China’s PMI, which measures its manufacturing sector, slid for the 5th consecutive month which led many to question the health of the global recovery. A few hours later, the euro-zone said its PMI index unexpectedly fell due to weakness in France and Germany, which are Europe’s two strongest economies. Separately, there was a 24-hour strike in Portugal to protest their austerity measures and Italy’s largest trade union also called for a strike which would weaken two already fragile economies.
All this overshadowed decent strength from the U.S. economy. The Labor Department said weekly jobless claims fell -5,000 to 348,000which was a fresh four year low. The Conference Board said its index of leading economic indicators rose +0.7% in February which topped the Street’s estimate for a gain of +0.4%. Finally, home prices remained relatively flat in January across much of the U.S. according to the Federal Housing Finance Agency. However, compared January 2011, prices fell by -0.8%. Stocks were relatively quiet on Friday as investors digested a busy week of economic data. The Commerce Department said new home sales unexpectedly fell by -1.6% to a seasonally adjusted 313,000-unit annual rate in February. The report showed that the median home price swelled by +8.3% to $233,700, the highest level since June.

Market Outlook- Confirmed Rally