Everyone’s Still Watching Greece and Ukraine

Already hovering near all-time highs, the S&P500 inched up another 0.6% last week on very low volume. All the evidence points to the fact that this gain was based on a short-squeeze; for example, the most shorted stocks were the ones that rose the most in percentage terms. This weekly rise, judging by the abysmal volume, was most certainly not a reflection of investor exuberance or new money rushing into the stock markets. Volatility, as reflected by the VIX, dipped somewhat as well.

Technical analysis is now screaming that the S&P is very overbought. Prices on both the daily and the weekly charts are hugging the upper Bollinger bands. But while prices roared back up to new highs, several indicators of market breadth aren’t doing so well. In other words, they’re not confirming the surging price. The McClellan oscillator, for example, dropped off a bit last week. This suggests, once again, that the index is rising on the back of fewer, yet very large, leaders rather than rising due to a broad market participation where large and small firms are going up.

While there weren’t a lot of economic reports released last week, almost all were quite bad. It all started with the Empire State manufacturing index which missed expectations by about 20%. Then the housing market index registered a drop, instead of an expected rise. Core producer prices fell, and this is more indicative of a slowing economy, not a growing one. Industrial production came in 50% below expectations. The Philly Fed index also missed badly, as did leading indicators. The only minor bright spot was seen in weekly jobless claims which came in slightly better than expected.

Finally, all eyes are still on Greece and Ukraine. While both hot spots seemed to have calmed down by the end of the week, neither problem is truly solved…..not even close. Ukraine’s recently signed truce with Russia was already starting to fall apart by week’s end, and Greece’s 4 months extension with the Troika is only a draft. Both sides need to formally agree on details and get them approved before the “deal” becomes real.

So while stocks once again are priced for perfection, the myriad of political and economic problems beneath the surface have not gone away. If anything, they have been ignored with the hope that they will ultimately be solved. So the risk is that one day, one of these big problems blows up and reminds the markets that the problem was never actually solved.

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