Greece is Falling

June 29, 2015

Last week, the S&P500 slipped 0.4% on light, but rising volume. Volatility, as would be expected in a losing week, inched up, but only by the smallest of margins; the VIX index ended the week still near the super low levels reached multiple times over the past 12 months.

The technicals suggest that the S&P500 is weakening over the last several weeks. On the daily charts, the S&P never regained the old highs set in mid-May (never mind the fact that it didn’t establish new highs) and instead, took a turn downward in late June. Friday’s close was slightly below the 50 day moving average. This is nowhere near the upper Bollinger band, so on the dailies, the S&P is not currently super-stretched in terms of being over-bought.

At the same time, on the weekly charts, there isn’t much visible damage yet.  The 200 day moving average is moving up from the bottom left to the upper right and prices are comfortably above it, and more importantly, so is the 50 day moving average. As of right now, the bull market move is not over.

In economic news, the picture has also not changed. While Wall Street hovers near all-time highs, Main Street continues to struggle. Last week, the Chicago Fed National Activity index fell….yet again. Durable goods orders fell far more than expected; on the other hand, orders ex-transportation only met expectations. The House Price Index missed. PMI manufacturing flash also missed. New home sales and existing home sales were both slightly stronger than expected. The final 1st quarter GDP report was still negative—keep in mind, the economy actually shrank in the first quarter of 2015. Personal spending was higher than expected, but much of that came from mandatory expenses such as gasoline and healthcare. Folks didn’t want to spend extra money on these things; they had to.

Finally, last week in an entry titled “The End of the Road for Greece?”, we wrote the following:

“…the big story of the week was Greece, again.  This time, however, it looks like the almost broken state is finally reaching the end of the road, in terms of getting additional funding from its creditors. Banks throughout the nation, especially over the last few weeks, have witnessed a massive removal of deposits, leaving these banks short of funding. Up until now, the European Central Bank has been financing this run on deposits with emergency loan funding arrangements. But since the newly elected government of Greece is refusing to bend to the Troika’s demands for further austerity measures, the release of additional funds from the Troika of creditors may not be forthcoming. And if this happens, then the ECB will soon be forced to stop throwing good money after bad and it will cut off emergency bank funding.”

Sure enough, this just happened—additional emergency lending was cut off.  And on Monday, June 29th, Greece announced that banks will be closed throughout the nation. Capital controls have been imposed. And the country is moving to the brink of total financial collapse.

Over the next 5-7 days, it will become clear if this collapse actually happens. But in the meantime, risk markets around the world have taken a tumble in response to the developments in Greece. Sovereign bonds in Portugal, Spain and Italy have plunged in value (yields have soared) and equity prices—especially in banks in these PIIGS nations—have plunged.

So for all of the experts who argued that Greece can be kicked out of the eurozone and the effects on everyone else would be “contained” are so far being proven to be wrong. Very wrong.

 


The End of the Road for Greece?

June 22, 2015

After weeks of falling or stalling, the S&P500 finally managed to register a gain for the week, rising almost 0.8%. Volume was light, so once again, this means there was no stampede by new buyers jumping in to buy stocks. And volatility fell back, as would be expected in a week when prices rose.

The technical picture is still somewhat concerning.  The distribution pattern that began in early 2015 is still fully intact. When prices essentially go nowhere for six months, hovering near all-time highs, the most common explanation is that professionals are selling and retail investors are buying…..hence the term “distribution”. The problem with this, of course, is that the professionals are the “smart money” and retail investors are often the “dumb money”.  And most large corrections in stock market indices are preceded by this phenomenon. That said, of course, there is no guarantee that the much-delayed correction is imminent.

In US macro news, the week started off with a disappointing Empire State manufacturing survey report; instead of rising as expected, the survey fell, and recorded its lowest reading since January 2013, almost two and a half years ago. Industrial production also fell when it was supposed to rise; industrial production is now down year-over-year for six months in a row, the worst stretch since January 2010! Consumer prices, at the more important core level, rose less than expected; so the Fed is not threatened with even the hint of a rise in inflation. Initial jobless claims continue to creep downward, registering their lowest level in many years. The Philly Fed survey beat expectations, as did leading indicators. All in all, the picture hasn’t changed—the US economy is only limping along, growing (when not shrinking as it just did over the winter) at a very tepid pace.

Finally, the big story of the week was Greece, again.  This time, however, it looks like the almost broken state is finally reaching the end of the road, in terms of getting additional funding from its creditors. Banks throughout the nation, especially over the last few weeks, have witnessed a massive removal of deposits, leaving these banks short of funding. Up until now, the European Central Bank has been financing this run on deposits with emergency loan funding arrangements. But since the newly elected government of Greece is refusing to bend to the Troika’s demands for further austerity measures, the release of additional funds from the Troika of creditors may not be forthcoming. And if this happens, then the ECB will soon be forced to stop throwing good money after bad and it will cut off emergency bank funding.

If this happens, then all hell may break loose. Capital controls will probably be needed in Greece. A parallel currency may emerge; and if that doesn’t work, then an official new currency will likely need to be created….something akin to the old Drachma. Inflation may skyrocket. Financial transactions may freeze for a while. And the overall economy may fall even more than it already has.

But while most experts can safely predict what would happen inside the country, very few can confidently predict what would happen outside the country. And the big question is this—will there be contagion, in the financial markets, in the real economies of surrounding states and regions? Very soon, we will find out.


Stocks Fall and Investors Panic?

June 15, 2015

Last week the S&P500 ended virtually unchanged. Volatility dipped just a little….. back towards, but not quite at, the super low levels reached in the summer of 2014. Volume was very much ho-hum, as would be expected in a week when prices didn’t change.

The technical picture also didn’t change very much. Since the S&P retreated a couple of percentage points from its highs in May, the extreme overbought condition—especially on the daily charts—has abated. The major moving averages (the 50 day and the 200 day) are slightly more converted; that said, the 50 day is comfortably above the 200 day, so the dreaded “Death Cross” is not around the corner. Most technicians can argue the bull market is still if effect.

At the same time, momentum and other measures of market internals, have weakened quite notably. For example, the percent of stocks above their 50 day and 150 day moving averages has dropped quite a bit. So while the overall stock indices are still close to their all-time highs, internally, things look much weaker.

On the macro front, last week was nothing to write home about. To kick off the week, the labor market conditions index missed badly. While the number of job openings rose, initial jobless claims were worse than expected. Retail sales also missed. Import prices rose much more than predicted; this will hurt corporate profits. Producer prices were a little hotter than expected. But inventories jumped, and despite all the weakness in consumer income and spending over the last six months, the consumer sentiment index registered a rise. Go figure.

Finally, as already noted, the S&P500 is only a few percentage points off its highs…just about 3%.  But what’s interesting is that despite the measly drop in prices (3% is nothing to write home about. 10% and even 20% are more meaningful) so far from the all-time highs, something interesting has happened to investor confidence—-it’s plunging.  Measures of investor confidence include junk bond demand, safe haven demand, market volatility, put & call option ratios, and price breadth and momentum indicators. And these have all dropped a lot……after a 3% drop in the S&P, not a lot.

So one naturally wonders—if a tiny 3% drop in stock prices puts investors on edge, how are they going to feel when stock prices drop 10%, or gasp, even 20% in the future?  Will total market panic ensue? Is there something even worse than panic to describe how they’ll feel?

No matter how investors react to larger future losses, it’s interesting to note how “on edge” they already are when they’re down only 3% from all time highs. To anyone with any common sense—forget about all deep market wisdom or experience—this should be a warning sign that the US equity markets are on the edge of all out panic.


Technical Test for the S&P 500

June 8, 2015

The S&P500 lost another 0.7% last week. This time, unlike the week before, volume rose a bit, suggesting that some more serious selling was going on. To add to the concern, although only slightly, volatility also inched up on the week. But it remains at the low end of its cyclical range.

Most of the week’s economic reports were weak, as usual.  Personal spending missed expectations by a wide margin; instead of rising by 0.2%, it was unchanged. Personal income rose somewhat more than expected, but this doesn’t help economic growth because the greater income was saved, not spent on goods and services. Factory orders plunged; they were expected to be unchanged. This was the 8th negative print for factory orders in the last 9 months, and the 9th miss in the last 10 months.  ISM services missed, as did the PMI services index. Productivity continued to disappoint. This means that wages as a percent of corporate sales are increasing and this means that negative pressure on corporate profits is building. The big number of the week—payrolls—beat expectations, but as in prior recent beats, the extra jobs came from severe seasonal adjustments and the addition of low-paying, un-benefited jobs such as waiting on restaurant tables, bartending, retail help. At the same time, the unemployment rate went the wrong way—it rose, and the gross number of employable people who are out of the workforce also rose.

The technical picture can be read two ways. The first is benign, and almost positive.  With the recent mult-week pullback in prices in the books, the overbought nature of the US equity markets has abated somewhat on the daily charts.  For most of the last two years, whenever this has happened, a strategy of buying the dips has been the correct strategy to follow. And for anyone wishing to continue with this approach, now is the time to buy more….on the dip….stocks.

The second way of reading the S&P from a technical analysis standpoint is more worrisome. Since the S&P500 has gone virtually nowhere for almost six months, key moving averages have started converging, or pinching.  While the 50 day moving average was breached last week, this has not been a big concern for the S&P for a long time. But what has almost always held over the last two years is the 100 day moving average. While this support level broke down in October 2014, for most of the last two years it has been working. But now it’s about to be tested again.  And if it fails to hold, then a test of the 200 day moving average becomes much more likely to happen. And that would mean another 2% drop from current prices. Because these major averages are converging, it no longer takes a huge move, in percentage terms, to break through any of them.

So once again, the US equity markets are coming to a crossroads.


US Equity Markets Still Going Nowhere

June 1, 2015

The S&P500 dipped about 0.9% last week. The very light volume suggests that there was no strong conviction behind the selling; perhaps it was just the usual pre-summer lightening up than many investors do each spring (“sell in May and go away”). On the other hand, volatility did inch higher, but that would be expected in any down week and still, by the end of the week, the VIX index was not too far above 2015 lows.  Fear has certainly not returned to US equity markets.

The news on the US economy has not changed; it’s still limping along as it has for several years now. Last week, the durable goods orders report was slightly better than expected. Consumer confidence and new home sales also beat their respective consensus estimates…..slightly. But everything else was mostly disappointing. The FHFA house price index missed. PMI flash services missed. The Dallas Fed manufacturing survey missed badly. Initial jobless claims came in worse than expected. Chicago PMI was a disaster. And the first quarter GDP shrank at an annualized rate of 0.7%. To repeat, the US economy actually contracted; but to be officially declared a recession, the US economy must shrink for two consecutive quarters.

Technical analysis still points to a market that’s overbought and forming a distribution pattern.  While the pull back last week means the market is not quite as overbought as it was the week before, prices on the S&P500 are still hovering not far from the upper Bollinger band on the daily charts. And the bull market cycle is still intact—the 50 day moving average is above the 200 day moving average and the 200 day is still sloping upwards.

On the other hand, some more causes for concern have emerged. First, the Dow transports just experienced a Death Cross, where the 50 day moving average crossed below the 200 day moving average. This means the Dow transports are poised to enter a bear market, and the importance of this is the link between the transports and the main indices—transports have often (but not always) led the general indices. And if this happens again, then the bearish development in the transports is worrisome. Second, the S&P500 started the year 2015 just below 2,100 and now, fully five months later, it’s still near 2,100.  So a lot of market watchers are starting to worry that this “stalling” in the upward momentum could be a sign of a larger change in direction. Of course, this could also be a speed bump on the road to more gains; but if so, then these gains must start showing up soon, as in over the next couple of months. If not, then we might get that correction that has long eluded the US equity markets. Very few people are predicting a crash, but quite a lot of market watchers are openly saying that at 20% correction is long overdue.