While the S&P500 barely moved last week, but it did manage to creep up another 0.3%. Weekly volume was very light—among the lowest of the year. And volatility dipped back down, but not quite to levels reached in late April.
The technicals have changed very little from last week. Yes the US equity markets are still in a bull market mode (and that won’t changed until prices fall below the 200 day moving average far enough and long enough to turn that average downward). Yes prices are still hovering near all-time highs. But at the same time, valuations are super stretched—the markets are as overbought as they’ve ever been, on both the daily and the weekly charts, prices are hugging the upper Bollinger bands. And the lack of clear direction in the equity markets, a phenomenon that started at the beginning of the year, continues to hold true. In fact, an indicator called the Average Directional Index has now fallen to such low levels that the last time we saw this was in mid 2008 and mid 2012. In both cases, the lack of direction was resolved by a sudden drop in the markets….by a huge percentage in late 2008 and a much more limited percentage in 2012. Either way, it looks like this “hovering” effect in the S&P500 will not last much longer. But which way the market moves is yet to be determined.
US economic news was particularly bad last week. The JOLTS survey missed badly. Retail sales also missed—both headline and ex-autos. Business inventories disappointed. Producer prices plunged; while on the surface this could be seen as a good thing, it usually means that demand for primary goods is falling and that deflationary forces are lurking. The Empire State manufacturing survey missed. Industrial production missed and consumer sentiment registered its biggest miss on record! Not good.
In Europe, the Greek debt crisis finally appears to be coming to a resolution. Not in a good way, however. Even though Greece made its most recent payment to its creditors recently, it did so by tapping into reserves that were not designed to be used for any payment whatsoever. And now that these reserves are used up, no more large amount of funds appear to be available for repayments that must be made over the next couple of weeks. And since Greece’s creditors are not budging by not issuing concessions or new loans, that means that Greece is on the verge of default. And by “on the verge”. we’re talking about two weeks.
So how are the markets reacting? Surprisingly, most are yawning. And equity markets in particular seem to be worry free. Sure, some peripheral European government debt market spreads are widening a bit (but they’re still near record low levels) and Greece equity and credit markets are under pressure. But all in all, not only is there no panic in the air, but there’s a general feeling that even if Greece defaults, the global capital markets are prepared and can handle the potential stress, if any.
Funny, but that was very similar to what the markets were predicting when Bear Stearns was about to fail in early 2008. And by and large, the markets did hold things together for the 4 – 5 months after Bear went down, until of course Lehman failed.
So we will soon find out if Greece goes down, will Greece be a Bear Stearns or will it be more like a Lehman Brothers, or in the most optimistic scenario, will it be none of the above and be a non-event.