After all was said and done, stocks closed higher last week as optimism grew that a deal would be done in Greece. As mentioned in prior weeks, the "big" story here is not just Greece - it is the precedent that will be set and the broader ramifications for the entire Eurozone if Greece would be allowed to exit. Remember, if Greece is allowed to get away with defaulting and missing payments, then other troubled countries in the Eurozone (Spain, Italy, Portugal, etc) will quickly follow, and that could threaten the continent and the global economy. We wrote last week that it was very important for the 200 DMA line to hold. Turns out that is exactly what happened, as cooler heads prevailed (for now). Remember, its not the news that matters, its how the market reacts to the news. So far, this appears to be another healthy short term pullback in both size (small percent decline) and scope (short in duration). As long as last week's lows hold, we have to expect higher prices to follow. Conversely, if last week's lows are breached, then we expect a new leg lower to commence. Until then, we are still in a bull market (at the deepest last week the S&P 500 only fell -4.2% below its record high) and surprises, in bull markets, occur on the upside.
Monday-Wednesday's Action: Stocks Plunge On Greek Woes:
Stocks closed lower on Monday after 61.3% of the Greek population voted 'no' and rejected the terms of the latest bailout. The results of the referendum allowed Greece's Syriza party to stay in power, but Finance Minister Yanis Varoufakis was forced to resign and Oxford-educated Euclid Tsakalotos took his place. The European Central Bank adjusted haircuts on Greek collateral for the Emergency Liquidity Assistance (ELA), but the details were kept private and not revealed in the press release. In the US, economic data was mixed.The PMI Services Index slowed in June to 54.8, missing estimates for 55.1. The ISM service index held steady at 56.0, matching estimates for 56.0. Separately, Humana ($HUM) rallied after agreeing to be acquired by Aetna ($AET) as part of a transaction valued at $230/share. China's Shanghai Composite continued to trade like a penny stock and rallied a +2.4%, down from an intra-day high of 8%, after China's Central Bank (The People's Bank of China) extended a lifeline to equity brokers through the China Finance Securities in an attempt to stem the recent decline.
Tuesday was a very big support day for the major averages. The S&P 500 dipped into negative territory for the year and briefly broke below its 200 DMA line before the bulls showed up and defended that important level. Technically, it was a big support day for the market as the bulls defended important inflection points in all the major indices: the 200 DMA line for the S&P 500 and Dow Industrials and the 150 DMA line for the Nasdaq and the Russell 2000. Greece submitted a new proposal to get emergency funding for the month of July, which would kick the can further down the road. Crude oil prices continued to plunge, falling over 10% in three trading sessions. Other commodities, like gold and silver also fell hard as the US Dollar rallied. Lots of areas of the market are breaking down, which bodes poorly for this ongoing and aging 6.5 year bull market. China announced unprecedented measures to stop their market from crashing. They stopped trading in many of their stocks, banned short selling, threatened to arrest short sellers, printed more money to buy shares, and did everything in their power to further manipulate their equity market. It is important to note that a year ago, they created a huge bubble in their stock market, a.k.a. The Beijing Put, and are now doing their best to stop the inevitable crash that comes after a bubble bursts. This erodes investor confidence and causes many people to avoid China as an asset class. Separately, the IMF urged the Fed (again) not to raise rates in 2015.
Stocks sold off hard on Wednesday, almost erasing all of Tuesday's big rally, after a new deadline was set for Greece to stay in or leave the Eurozone. Outside of stocks, three rather odd major supposedly unrelated technical glitches occurred on Wednesday: United Airlines ($UAL) was forced to shut down all flights due to a technical glitch, the floor of the NYSE was shut down for almost 4 hours in the middle of the day due to a technical glitch, and the Wall Street Journal's website was offline, also due to a technical glitch. We are being told that they were unrelated events and not due to a cyber attack. Electronic trading was not affected by the technical glitch so trading continued, just off the floor. These are the facts and, as always, we will let you decide. Needless to say, cybersecurity stocks rallied sharply (and remain a favorite group of ours). The Fed released the minutes of their latest meeting which showed the Fed still remains data-dependent.
Thursday-Friday’s Action: Stocks Rally on Greek Optimism
Overnight, shares in China soared after the government stepped in with another round of crazy interference to manipulate their stock market. Stocks opened sharply higher on Thursday but closed near their lows as the rally quickly faded. The Dow opened up 250 points and closed up 32 points. Elsewhere, optimistic-sounding remarks from top Eurozone officials also helped boost stock prices. Economic data was limited to weekly jobless claims. The Labor Dept said weekly claims rose to 297k, which missed estimates for 276k. The July 4th holiday was blamed for the distorted reading. Separately, earnings season officially began when Alcoa ($AA) rallied after reporting a bottom line miss on better than expected revenue. Stocks opened sharply higher on Fri after Greece submitted their latest proposal to stay in the Eurozone. In another technical glitch, TD Ameritrade ($AMTD) said they were experiencing a 'widespread' problems executing orders. The issue was resolved by 10 AM EST and the company said was due to a "software update." The same reason given for the technical glitch at the NYSE on Wednesday. The transports opened up nicely, led by the airlines, as crude oil plunged -13% in the past two weeks. Janet Yellen gave a speech on Friday and largely reiterated her recent stance that rate hike remains in the cards in 2015...if the data improves. Going into the weekend, it looks like a deal will be made in Greece. Of course, anything is possible.
Market Outlook: The Central Bank Put Is Alive And Well
Remember, in bull markets, surprises happen to the upside. This has been our primary thesis since the end of 2012. We would be remiss not to note that this very strong bull market is aging (celebrated its sixth anniversary in March 2015 - the last two major bull markets ended shortly after their 5th anniversary; 1994-2000 & 2002-Oct 2007). To be clear, the central bank put is very strong, and until material damage occurs, the stock market deserves the longer-term bullish benefit of the doubt. As always, keep your losses small and never argue with the tape. If you want exact entry and exit points in leading stocks, or to access more of Adam’s commentary/thoughts on the market. Consider joining SarhanCapital.com.
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