The S&P500 jumped 1.6% last week on substantially lower volume, so the weak conviction pattern persists–when stock prices fall, investors rush to exit, but when stock prices rise, there’s no rush to jump into this market. At the same time, as would be expected in an up week, volatility dropped back down, but nowhere near the ultra-complacent lows of last summer.
The technicals point to a mixed picture. On the daily charts, the S&P actually looks like it’s poised to moved even higher in the short term. The lows of mid-December, early January and mid-January have been touched three times and have held. This could create a “floor” or support for technicians who may now feel more confident to take on risk on the long side—ie. they’ll tend to buy more. On the weekly charts however, a large rolling top seems to be forming, and unless the highs of late December are taken out, the risk is that some technicians will take money out of stocks because they fear that a more serious correction could ensue.
There weren’t a lot of US economic reports released last week. And aside from the housing starts figures (which slightly beat expectations), most of the reports were disappointing. The housing market index, initial jobless claims, PMI manufacturing, existing home sales, housing permits, and the Chicago Fed National Activity Index all missed consensus expectations. So once again, no good news for Main Street Americans.
While the announcement of new Quantitative Easing from the European Central Bank came in mostly as expected (actually slightly more euros will be created for a longer period of time….than many experts had predicted), and the markets mostly yawned about the results afterwords, the Greek election was a complete disaster for the forces that wish to impose austerity on the southern, Mediterranean states such as Greece. Instead of coming up with a last-minute Hail Mary victory, these forces witnessed the hard-left anti-austerity party cruise to victory and form a new government with another anti-austerity junior partner.
And while the markets mostly yawned about this event on Monday after the election, we must not forget that markets tend to take a long time—weeks and sometimes months—to fully digest the consequences of major political, economic or financial changes. Remember, Bear Stearns went bankrupt in March 2008, almost six months before the global financial meltdown climaxed in the fall of 2008.
And with the new leadership of Greece openly pledging NOT to honor the onerous and enormous debt obligations to the ECB and the IMF (and these debt obligations exceed 200 billion dollars), the consequences—down the road—for all risk markets cannot be good. And the greater risk is that if states such as Spain and Italy watch Greece shake off its debt burdens and free its people from the pains of austerity, then these other states may follow in Greece’s footsteps. And if this happens, then Italy and Spain may become the “Lehman Brothers” shock of 2015…..and this type of shock would certainly bring the markets to their knees, just as Lehman did in late 2008.