It is the eve of Greek default to the IMF, the country has capital controls in place, no deal is at hand and global markets fall.
Greece dominated the news and the market today. Capital controls for banks were announced during the overnight hours and sparked another round of protests. The news, not unexpected, comes on the eve of an apparent to default to the IMF. Controls will keep banks closed for the next few days, limit the amount of ATM withdrawals by Greek citizens to 60 euros, prevent the transfer of money out of the country and large transactions to electronic means only.
Early afternoon S&P lowered Greece's credit rating to CCC- with negative outlook. They say a Greek exit from the Euro stands at 50% and that without changes a default is inevitable, likely to occur within the next 6 months. Later in the day Fitch downgraded the Greek banks to restricted default. Greece, or PM Tsipras at an rate, continues to snub creditors and is urging the people to vote no on a referendum to accept terms.
Puerto Rico added a little downdraft to today's sell-off. The governor of the heavily indebted island territory announced today, of all day's, that the debt load was unpayable. The island needs debt restructuring and reforms, long overdue, and is not expecting to receive aid from the federal government.
Equity markets around the world fell on Greece' apparent imminent default. Asian indices fell nearly -3% in a volatile day of trading, led by the Shang Hai Composite. European indices fared no better, the DAX closed with a loss greater than -3.5% after hitting a low greater than -6% in intraday action.
Our markets were not immune, futures trading indicated an opening near -1% lower than last week's closing prices and that did not moderate into the open. There was little data and few earnings reports to influence early morning action leaving the indices trading lower once the opening bell sounded. The early low was hit soon after the open, followed by a small bounce and then another intraday low around 11:30. The morning low did not find support, selling continued throughout the day with the market hitting new lows more than once and leaving the indices at the lows of the day.
Pending Home Sales was released at 10AM, rising 0.9% in May from a mild downward revision to April. Despite April's revision this is the 9th month of year-over-year increases in pending sales and the highest level since April 2006. The May gain is a little below expectations for 1.2% but explained away by the uptick in mortgage rates we saw during the month. According to NAR economist Lawrence Yun 2015 should be the best year in housing since the bubble burst but rising prices and tight inventory remain a concern.
Moody's Survey Of Business Confidence remains near all time highs and, according to survey moderator Mark Zandi, is led by businesses in the US. The index fell by -0.2%, the fourth week of decline, and hit the lowest level in three months. Despite the drop results show that hiring and business spending are strong.
According to data from FactSet the expected blended rate for S&P 500 earnings growth in the 2nd quarter has risen a tenth of a percent to -4.5%. This is still double the expectation at the start of the quarter but the first of what I suspect will be multiple upward revisions. So far 15 companies have reported with 11 beating earnings estimates and 7 beating on revenue. Oil companies and those with international exposure are expected to see the largest declines in year-over-year earnings growth, -60% for energy and an average -12.6% for those with international exposure.
Looking at earnings growth ex-energy, the 2nd quarter is expected to see growth of +2.1% at current projections and could go as high as +6% if earnings trends hold true. There are a handful of S&P companies reporting this week, the season kicks off next week on Wednesday with Alcoa, the big banks will release the week after.
This is a big data week. Tomorrow is the end of the month, the end of a quarter, the end of the first half of the year and the start of a new round of macro data. My top picks are the employment bundle including ADP, Challenger, claims, NFP and unemployment. Also on deck are auto sales, PMI, Consumer Confidence, Construction Spending, ISM and many others. Friday the market is closed for the July 4th holiday so many of the releases we usually see on Friday will come out on Thursday.
The Oil Index
Oil prices fell more than -2% to hit a three week low in today's session. Greek default has cast a shadow on global growth outlook which, along with high supply/production, has tipped the scales in favor of the bears. However, even with today's drop to $58.30 for WTI, prices remain well within the 3 month trading range because the Iran nuclear talks, which are reported to go beyond tomorrow's June 30 deadline, and violence throughout the middle east continue to support prices.
It will be interesting to see oil/gas storage numbers this week and next. This weekend, the three day July 4th holiday, is expected to be one of if not the biggest driving weekends ever.
The Oil Index fell a little over -2% and set a new 3 1/2 month low. The fall has taken the index down to just above the long term trend line. The indicators are rolling over into a bearish crossover, consistent with a test of support, but are also consistent with that support over the longer term.
Second quarter earnings outlook has had the sector trending lower over the past month, approaching the long term trend line, and could be setting us up for another bounce. Poor earnings could see the trend line tested but once we get past 2nd quarter season outlook begins to brighten and should provide support for the sector. In the near term the trend line my get tested but such a test is likely a good entry point for bullish positions.
The Gold Index
Gold prices got a lifted and pressure by Greece today. Fear sparked a flight to safety trade that helped to support prices while at the same time the news helped to weaken the euro, strengthen the dollar and cap gold's gains. Today's move carried gold higher by roughly $5 to trade around $1179. The gain is small but illustrates support action at previously indicated levels.
The gold miners did not get a boost from higher gold prices. The miners ETF GDX closed with a loss, but only about -1.0% compared to the -2% loss experienced by the broader market. The ETF is trying to break support along my line at $18.00 but has not done so yet. The indicators are showing near term bearishness but remain consistent with that support. This test of support could continue with $16.50 potential target if it is broken. In the long term it still looks like this sector is in a bottom/reversal and this dip to support an entry opportunity. Of course, gold prices will play a big role here and will likely add volatility as this week's data is released, and Greek news come out.
In The News, Story Stocks and Earnings
Sysco announced it would end its bid to buy US Foods. The move was sparked by the recent FTC injunction to prevent said purchase. Company CEO said based on the ruling it was in the best interest of shareholders to move on. The deal, if completed, would have created the largest food distributor in North America. At the same time the company also announced a new $3 billion share repurchase program. The news caused Sysco to drop more than -2.25%, coming to rest on the $37.50 support line which, coincidentally, I drew the day the proposed purchase of US Foods was announced.
The Supreme Court released its final opinion of the session this morning, siding in favor of utility companies and against the EPA. The opinion, 5-4, says the EPA did not take the financial impact of new regulation into account when issuing pollution controls for power plants. The utilities sector was one of very few to trade in the green today, the Utilities Spyder XLU gained about a quarter percent. Today's action is a move up from support levels near $41.50.
Old Dominion Freight Line got an upgrade at Stifel today. I thought it interesting in light of the ongoing correction in the transportation sector. Old Dominion is a less-than-truckload shipper with positive fundamentals. The upgrade, from hold to buy, carries a price target potentially 22% above today's close based on consensus estimates. Stifel's target is $80, a gain of near 17%. Shares of the stock got a pop in the premarket, opened with a small gap but sold off during the day to close the gap and end with a loss.
There were a slew of downgrades in the financial sectors. Names ranging from JP Morgan to Suntrust and a number of smaller regional banks were lowered from Outperform/Buy to hold/neutral ratings. The news, along with fear of Greek fallout/contagion in the finance sector had the entire sector trading lower. The XLF Financial Sector Spyder lost more than -2.4% in today's action and fell to a new two month low. The indicators are rolling over into a bearish crossover so appear to be leading prices lower. Today's action broke potential support around the $24.50 level with $24 next target should the sell-off continue.
The indices began their fall in the early hours and did not stop until the closing bell. The loses, while bad news for bulls, were not as bad as they could have been. Indices in Asia an Europe lost over -3%, ours, led by the NASDAQ Composite, lost an average near -2%. Today's action carried the tech heavy index -2.4% lower and below the short term moving average in a move that looks intent on reaching the long term trend line. The indicators have completed a bearish crossover with today's price action and point to lower prices in the near term. Current target is the long term trend line, near the 4800 level, with 4700 next target should the first one not hold. The long term trend remains up so the move down to support is a potential buying opportunity that may be sparked by the upcoming earnings season.
The S&P 500 made the next largest move and perhaps the most notable candlestick. Today's action carried the index down -2.09% and created the longest black candle for at least the last 12 months. Price action broke support levels at the short term moving average, 2090, 2080 and 2060 coming to rest just above 2050. The indicators have rolled into a bearish crossover and are pointing to lower prices so a test of 2050 at least is likely. A break below this level, 2050, could carry the index down to the long term trend line near the 2000 level for a total correction near 7%. The long term trend remains up with positive forward outlook so I am on the lookout for the next bullish signal.
The Dow Jones Transportation Average fell -1.96%, the third largest decline in today's session, and appears to be heading for a much deeper correction than 10%. Today's candle is a break below the 8250 support line and an extension of the drop below the short term moving average and confirmation of trend line break which has been forming over the past month. On the longer term charts of weekly prices the indicators are gaining strength, convergent with the move lower, so I see a good chance of this index continuing its fall with potential targets near 8,000 and 7,500.
The Dow Jones Industrial Average made the smallest decline today but that is not saying much. The blue chips fell -1.95%, a hair less than the transports, and broke beneath support at 17600 and 17500. Today's action is confirmed by a bearish crossover in both MACD and stochastic that is not in line with the underlying trend. This move appears to be a correction to support/trend with a possible target along the my long term trend line near 17250.
There are a lot of possible reasons why the market sold off the way that it did today. Last week's reshuffling of the Russell indices could have a had ripple effect that carried into today, the ongoing Greek issue, the Puerto Rico news, the coming end to the quarter, the coming end to the half and an impending earnings season are all on the list. Most likely it is a combination of them all that are adding up to a correction back to trend.
Except for the transports, which for some reason have already corrected and appear to be heading lower, all the indices remain above long term trend lines and trending higher on ongoing economic recovery, improving labor markets and rising earnings. The long term trends have not ended, outlook has not turned negative or cloudy, so I expect the long term trend in the market to regain control of the market sooner or later.
The question is when will the long term trends take over? The answer could come soon since we're getting a substantial dose of economic data this week with earnings season starting next week. Data is expected to be decent and expansionary if not good, earnings expected to be poor with a good chance of being better than expected, a combination that could easily result in upside movement to the market. The caveats are two. In the near term of course is Greece, who knows what will happen next, tomorrow is their deadline to pay the IMF, Sunday is the scheduled referendum and a new headline could come at any time. In the longer term is the FOMC, rate hikes and how the market will react to lift off.
Until then, remember the trend!