After a several big up and down days, the S&P500 ended the week down a very small fraction of one percent. Volume perked up a bit, but this was mostly due to the greater uncertainty in Greece as many traders sold down some risk in case negotiations collapsed in the Mediterranean state. The Vix index jumped back up to about 20, which was its highest level since February of this year.
The oversold condition we noted last week in the daily charts looks like it’s poised to correct itself over the upcoming week. Any sort of modest bounce back in equity prices would remove this condition, and bring the index back to its usual crossroads—does it turn up and resume its march higher to new all time highs, or does it resume its distribution or sell-off and continue backing away from the highs reached in May? If the latter happens, then there could be a substantial risk that the 50 day moving average could pinch into the 200 day moving average. And if this were to happen, then a vast army of technical traders would be poised to turn bearish on the S&P for the first time in four years, or since 2011, when the S&P lost almost 20%.
Not too many US economic reports were announced last week. PMI services came in lighter than expected. Consumer credit missed expectations. Initial jobless claims jumped way above consensus predictions and almost touched 300,000 for the first time in many months. On the positive side, international trade results showed a deficit that wasn’t as bad as expected. And wholesale trade came in stronger than expected. All in all, there’s no change in the US economic picture, which is growing anemically, at best.
Finally, the Greece saga has returned to the front pages of most news outlets around the world. After holding a referendum on a proposed bailout in early July, and witnessing an outcome in which 61% of the people rejected the proposed bailout, the Greek prime minister just announced that he will ignore the will of the people and instead accept a draconian set of measures (or more accurately labeled as punishments) in order to secure even more billions of euros in debt, debt that will be used primarily to service the lenders on even older debt.
Shockingly, the Greek prime minister has just thrown his country under the bus, all with the supposed intention of keeping his country in the euro. And even if he’s able to pass all the laws required of him by Germany and Brussels over the next week, there’s no guarantee that Greece will even then remain in the euro.
Many non-Greek experts are already arguing that defaulting on the European debt, abandoning the euro and suffering another short-term recession would be less punishing than the new tax hikes and pension cuts agreed to by the prime minister.
And others still are claiming that the next government (because it’s highly unlikely that a government that so openly ignores the will of the people will be able to survive) will be tempted to abandon this latest “bailout” anyway.
Either way, Greece looks like it just kicked the can down the road, again. Nothing has been solved in Greece or in the other PIIGS states, and the euro zone came as close as ever to ejecting a member, something that was unthinkable as recently as one year ago.