The major market indices finished the week modestly lower after a bailout plan for Greece was postponed for another week.

The Dow Jones Industrial Average (Dow) fell 0.47%, the Wilshire 5000 Total Market Index^SM (Wilshire 5000^SM) lost 0.32%, the Standard & Poor’s 500 Index (S&P 500) finished off 0.17% and the Nasdaq Composite Index (Nasdaq) shed 0.06%. Sector breadth was negative as seven of the 10 S&P sector groups finished lower. The Technology sector (+1.28%) was the best performer while the Materials sector (-2.17%) was the worst. The Canadian market, as measured by the S&P/TSX Composite Index, fell 1.49%.

The major market indices finished the week modestly lower after a plan to allocate additional bailout funds to Greece was postponed. The global markets remain on edge over the situation in Greece as a failure to find a resolution could set the stage for a default. Greece currently faces a March 20 deadline when 14.5 billion euro of debt is set to mature.

Greek policymakers had appeared to make some progress early in the week after reaching an agreement to implement austerity measures. European officials however didn’t feel the cuts were deep enough and decided to hold off on extending the next tranche (130 billion euro) of bailout funds. Their decision sent Greek policymakers back to the drawing board with a Wednesday (2/15) deadline.

Underscoring the need for a timely resolution was a statement last week from the International Monetary Fund (IMF) warning that economic growth in China could be cut almost in half if Europe’s debt crisis is allowed to worsen.

The pullback in the markets is likely to be more of a “pause to refresh” than the start of a larger correction, in my opinion. As mentioned in these missives over the past couple weeks, the markets had gotten a little ahead of themselves and a period of consolidation would be viewed as constructive and help alleviate the “overbought” conditions.

Despite all of the “noise,” the global markets—as defined by the MSCI All-World Index—returned to bull market status this week after advancing more than 20% from the early October lows. This was also true for the U.S. markets as the S&P 500 has gained over 22% since the October 4 closing low. While policy-related risks (both in the U.S. and Europe) still very much exist, the threat of a double-dip recession in the U.S. has virtually disappeared and contagion risk in Europe has started to diminished. The market’s recent performance seems to suggest that investors feel the path of least resistance remains higher and that the bigger risk is being out of the market versus in it. With that said, I continue to believe the market could be in for a cooling off period, as investors try to gauge what has been discounted in stock prices and what is likely to come to fruition. A period of consolidation however would be viewed as ‘healthy’ and would likely set the stage for the next leg up.

While in the near-term emotions and headlines tend to drive stock prices, over the intermediate to long-term it is fundamentals (earnings, interest rates, valuation, etc.) that count. As we transition to the next phase of the market cycle, where fundamentals will once again take center stage, the macro drivers of stock prices remain healthy and should ultimately become the driving force to further gains over the course of this year.

Sentiment Becoming Stretched - Another Yellow Flag?
Last week the American Association of Individual Investors (AAII) released its weekly survey of investor sentiment. The poll showed that bullish sentiment rose to 51.6% and now stands at the highest level in over a year. Bearish sentiment fell to just 20.2%. As often pointed out in these missives, sentiment—fear and greed—is often a determining factor in making investment decisions. These emotions also tend to be contrarian in nature, meaning investors are typically the most fearful (bearish) at or near market bottoms and the greediest (bullish) at or near market tops—stay tuned!

Economic Round-up:
While the economic calendar was almost non-existent last week, the few data points available showed the economy remains on firm footing. Last week the Labor Department reported that initial jobless claims during the week ended February 4 fell 15K to 358K. The results were solidly better than the 370K gain expected by economists. The 4-week moving average—which helps smooth the week to week volatility—fell to 366.25K, the lowest since April 2008. The decline in initial claims suggests that layoffs are starting to ease and, as underscored by the recent Payroll report, labor market conditions continue to improve. Also of note, the Mortgage Bankers Association reported that mortgage applications in the week ended February 3 rose 7.5%. The gain was boosted by a 9.4% jump in the refinancing component. The surge in refinancing reflected the decline in the 30-year fixed rate mortgage to 4.05%, the lowest reading on record.

Q4 Earnings
Through Friday, 358 members of the S&P 500 have reported quarterly results, with overall earnings up 4.06%. When the volatile Financials sector is excluded earnings are up a more respectable 8.3%. Of the companies that have reported, 63.9% have beaten analyst expectations, slightly better than historical 61% average. When all is said and done, fourth-quarter earnings for the S&P 500, according to Bloomberg data, are expected to rise 5.2% (+6.9% ex-financials), a moderate slowdown from recent quarters.

While overall Q4 earnings have been generally lackluster, there have been many bright spots including the blowout results from Apple Computer (an excellent proxy for consumer spending). In addition, 3M Company and United Parcel Services (UPS), both of which are considered economic bellwether due to their broad geographical reach and diverse product lines and customer bases, reported solid results and upbeat forward outlooks.

Looking Ahead
Headlines out of Greece will be watched very closely this week, as will any progress toward the extension of the 2% payroll tax reduction that is scheduled to expire at the end of this month. On the data front, the economic calendar will take center stage with reports due out on the Housing sector, Retail Sales, Manufacturing, and Inflation. Also of interest will be the release of the meeting minutes from the January Federal Open Market Committee meeting. The minutes will likely give us further insight into the Federal Reserve's (the "Fed") decision to hold rates at exceptionally low levels until at least late-2014. Earnings season continues to wind down with only 51 members of the S&P 500 scheduled to report results. Fed heads will be out and about this week with at least five speeches on the calendar.

I continue to believe that the U.S. equity markets remain well positioned for positive performance over the course of 2012. This upbeat viewpoint reflects the market's attractive valuation, the overall healthy nature of corporate balance sheets, expectations that corporate profits will remain strong, and the pledge from the Federal Reserve that monetary policy will remain accommodative through late-2014. In light of the favorable macro environment, I continue to believe that market weakness represents an attractive entry point, especially for longer-term investors.

Potential Risks/Wildcards: Expectations that equity prices will trend higher over time assumes that a resolution to the debt problems in Europe will be found, that monetary policy will remain accommodative, and that no major fiscal policy mistakes are made. An adverse outcome to any of the above factors would likely lead to a reevaluation of the bullish outlook.

Definitions

The Dow Jones Industrial Average is a price-weighted average of 30 blue-chip stocks that are generally defined as the leaders in their industry. It has been a widely followed indicator of the stock market since October 1, 1928.

Wilshire 5000 Total Market Index^SM represents the broadest index for the U.S. equity market, measuring the performance of all U.S. equity securities with readily available price data. The index is comprised of virtually every stock that: the firm’s headquarters are based in the U.S.; the stock is actively traded on a U.S. exchange; the stock has widely available pricing information (this disqualifies bulletin board, or over-the-counter stocks). The index is market cap weighted, meaning that the firms with the highest market value account for a larger portion of the index.

Standard and Poor’s 500 Index is a capitalization-weighted index of 500 stocks. The index is designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries.

The Nasdaq Composite Index is a broad-based capitalization-weighted index of stocks in all three NASDAQ tiers: Global Select, Global Market and Capital Market. The index was developed with a base level of 100 as of February 5, 1971.

The S&P/TSX Composite Index is a capitalization-weighted index designed to measure market activity of stocks listed on the Toronto Stock Exchange (TSX). The index was developed with a base level of 1000 as of 1975.

The MSCI World Index is a capitalization weighted index that monitors the performance of stocks from around the world.

The Mortgage Bankers Association (MBA) is the national association representing the real estate finance industry, an industry that employs more than 370,000 people in virtually every community in the country. The mission of the Washington, D.C.-based association includes, but is not limited to, investing in communities across the nation by ensuring the continued strength of the nation's residential and commercial real estate markets; expanding homeownership and extending access to affordable housing to all Americans and supporting financial literacy efforts.

Among the resources offered by the MBA are: The Purchase Index includes all mortgages applications for the purchase of a single-family home and covers the entire market, both conventional and government loans, and all products. The Refinance Index covers all mortgage applications to refinance an existing mortgage. It is an overall gauge of mortgage refinancing activity. It covers conventional and government refinances, regardless of product or coup rate refinanced into or out of.

Indices do not include any expenses, fees, or sales charges, which would lower performance. Indices are unmanaged and should not be considered an investment. It is not possible to invest directly in an index.

The individual companies mentioned in this piece were for informational purposes only and should not be viewed as recommendations.

The comments should not be construed as a recommendation of individual holdings or market sectors, but as an illustration of broader themes. This document contains forward-looking statements about various economic trends and strategies. You are cautioned that such forward-looking statements are subject to significant business, economic and competitive uncertainties and actual results could be materially different. There are no guarantees associated with any forecast and the opinions stated here are subject to change at any time and are the opinion of the individual strategist. Information in this report does not pertain to any investment product and is not a solicitation for any product. This material has been prepared using sources of information generally believed to be reliable. No representation can be made as to its accuracy.