Greece—Edging Closer to Disaster

The S&P500 climbed another 1.75% despite a slew of poor economic reports out of the US. Volume also rose slightly, but it’s still at very low levels when compared to the same week in prior years. And volatility continued to grind lower……ending the week at the lowest levels of the current year.

What happened in the US economy?  Nothing good, as usual. The week kicked off with a disastrous Chicago Fed national activity index release. Instead of rising slightly, the index logged a big drop. Initial jobless claims came in about 10,000 worse than predicted. The PMI manufacturing index disappointed, and did so by the biggest margin on record. New home sales plunged, to notch their biggest miss since mid 2013. And then, to cap off the week, durable goods ex-transportation (critical because transportation orders are notoriously volatile) missed badly—instead of rising 0.3% as expected, they fell 0.2%. Only existing home sales beat expectations among all the major reports released last week.

How can this bad economic news be good for stock market prices?  Simple—the worse the economy, the longer the Fed must delay its already long-delayed interest rate hike. And the longer the rates stay low, the better stock speculators feel about staying in stocks and buying even more, on ever rising amounts of margin loans.

The technicals now pint to a very overbought market—both on the daily and the weekly charts, the S&P closing price is hugging the upper Bollinger Band. Interestingly though, this relentless upward momentum is clearly fading in the last twelve months or so. Both RSI and the MACD lines are sliding downwards. Yes both are still in bullish territory, but in a much less convincing way than they were 12-24 months ago. So we see more divergences as prices continue melting up, and divergences on longer term charts (eg. weeklies) are more important that divergences on shorter term charts (eg. dailies).

In the rest of the world, everyone is watching Greece and the looming debt payments that it must make to Europe over the next two months. Unless Greece starts confiscating deposits (say, from its pensions funds) it will not be able to make all these repayments from internal sources. And since its European creditors have staunchly refused to extend any new loans (without Greece agreeing to more severe austerity measures, measures its newly elected government has refused to accept), then the possibility of a Greek exit, or “Grexit”, from the euro becomes more likely…..and soon.

The problem arises in the way in which the world’s financial markets (and even economies) would be affected by a Grexit. The standard line put out by European leaders is that such an event, while not meaningless, would not create a huge ripple effect in markets.

On the other hand, there is a growing concern that the actual effects are not truly knowable in advance and that something far from innocuous may occur if Greece were to leave the euro and default on its debt obligations. Even Goldman Sachs last week warned that there may be more downside than the consensus currently expects.

Either way, the Greek stand-off cannot continue without some resolution—one way or the other—for more than a couple of shorts months. We will not have to wait long for the outcome to become crystal clear.

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