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.