Greek PM Alexis Tsipras showed up at the meeting of the EU Ministers with what Art Cashin said was an empty briefcase. Tsipras promised the Greek voters he would have a signed deal in 48 hours but he apparently forgot to bring the details with him to Brussels. EU ministers were very upset by the lack of urgency but the market rallied anyway.

Market Statistics

The overnight events in Greece and China caused the U.S. equity markets to dive to four-month lows at the open with the Dow falling -218 points by 11:30. The S&P declined -25 and the Nasdaq fell -90 before a monster buy program hit and caused a major short squeeze. The Dow rebounded to +93, S&P +12 and Nasdaq +5.

It was very easy to tell it was a short squeeze because only the stocks that had the most bearish charts and highest short interest actually rebounded materially. For instance SM Energy (SM) rallied +5.5% after dropping to a five-month low at the open. Stocks with a positive trend over the last two weeks failed to post significant gains because the short interest was low.



Greece did make a short oral presentation to the EU ministers but it contained only generalities about the need for more money in the future. After Tsipras met with Angela Merkel she said Greece would present a new proposal by Thursday evening. However, she said "I am not exaggeratedly optimistic." It was reported later in the day that Tsipras requested an interim loan package to get through the rest of July while the terms of a longer-term loan program were debated. That 48-hour agreement promise just keeps slipping farther into the future.

Multiple EU heads including Merkel reiterated that there could not be any debt restructuring or reduction in the future because it would be illegal under EU treaties. Tsipras has said he would not agree to anything that did not reduce the debt owed by Greece while at the same time he is asking for more money.

EU ministers are scheduled to meet again on Saturday and review a Greek proposal assuming they have actually presented one by then. Multiple EU heads said if there is no "satisfactory" proposal and agreement with Greece by Sunday the EU will proceed to Plan B. While that has not been defined in the press it is widely assumed to be a Greek exit from the eurozone. EU Commission President, Jean-Claude Juncker said, "I am strongly against a Grexit but I cannot prevent it if the Greek government does not do what is asked of it."

Greece voted, Tsipras remains antagonistic, nothing has changed and the outlook for the future of Greece remains grim. Greek banks will probably remain closed for the rest of the week and possibly next week.

Fortunately, the U.S .equity markets may have finally shrugged off the constant drone of negative headlines surrounding the disaster.

European indexes all finished with steep losses because the future of Greece is important for the future of Europe.


The Shanghai Composite lost another -4.74% to close at 3,727 after China said it was ok to margin your home to buy stocks and asked money managers to invest nearly $20 billion in equities to support the market. Chinese demand for oil, copper and iron continue to slide suggesting the economy is slipping fast. The SSEC is now down -28% from its highs in June.

Newbie investors in China were margined to the max as the market rallied +150% over the last nine months. The rapid decline is crushing the wealth out of these investors. Making it worse the government has suspended trading in 745 companies or 26% of the listed firms. More than 200 were halted on Monday alone. The value of the shares is $1.4 trillion or 21% of China's market cap. The stocks are halted to prevent selling in an attempt to slow the market crash. However, by halting some shares and not others it means traders on margin have to sell what they have rather than what they want to sell. It may have made the sell off even worse. The decline in Chinese equities has erased $3.2 trillion in value since the June 12th peak. That is twice the size of the entire Indian stock market.


In the U.S. there was little in the way of economic reports to move the market. The Job Openings and Labor Turnover Survey showed job openings declined slightly in May to 3.6%, down from 3.7%. The number of openings at 5.363 million was still up +16.4% from the same period in 2014. Hires declined from 5.034 million to 5.0 million and separations declined from 4.895 million to 4.743 million. Quits also declined from 2.709 million to 2.699 million. Layoffs fell from 1.784 million to 1.653 million. This is a lagging report for May and it was ignored.

The California Manufacturing Survey for Q3 declined from 61.2 to 59.4 and the lowest level since Q3-2014. Nearly all of the subcomponents declined. The manufacturing sector is still being depressed by the strong dollar and the inability to sell products overseas. Meanwhile the commodity price component rose from 58.2 to 61.0 suggesting profits were getting squeezed. This report was also ignored.

The only material report for Wednesday is the FOMC minutes from the June meeting. Analysts are expecting to see that participants were questioning the wisdom of hiking rates in September without accelerated growth in the economy. The U.S. economy is still limping along and the Fed is expected to use the Greek crisis as an excuse for not hiking rates in September.


The chip sector was knocked for another loss after Advanced Micro Devices (AMD) said sales of personal computers were weaker than expected in Q2 and revenue was down -8% from Q1 levels. Quarterly revenue is expected to be $947.6 million and the first quarter of less than $1 billion in more than a decade. AMD shares declined -15% to $2.08.


Shake Shack (SHAK) lost its last friend in the brokerage community after Morgan Stanley (MS) cut the company to "underweight" from neutral. Not a single analyst currently rates SHAK with a buy rating. Morgan Stanley said the stock is overpriced and put a $38 price target on the stock. SHAK closed at $54.74. The broker said the price was "brand related euphoria" and not supported by market fundamentals.


Tesla (TSLA) shares declined -4% after Deutsche Bank cut the automaker from buy to hold. However, they did raise the price target from $245 to $285, which is about where Tesla was trading on Monday. DB said there was insufficient "risk/reward" to maintain the buy rating at this level. "We believe Tesla could become a dominant player but the shares already reflect that outcome."


Horizon Pharma (HZNP) went hostile in its bid for Depomed (DEPO) with an offer of $29.25. That was a 42% premium to Monday's closing price of $20.63. Shares rallied +39% on the news. Horizon said they had been conversing with Depomed since March but had been rebuffed repeatedly. Both companies have revenue of about $350 million each and Horizon said there would be significant synergies after a merger. Horizon specializes in orphan drugs while Depomed specializes in pain medicine. Depomed recently acquired Nucynta from J&J for $1.05 billion. The company raised the price of the drug by 44% after the acquisition.


Disney (DIS) was upgraded from neutral to overweight by Atlantic Equities with a price target of $150. Shares closed at $117. The company said the Disney franchise strength creates long-term visibility and earnings growth. Disney has so many projects on the calendar that it will be looking for a place to store its excess cash in the years to come. Scrooge McDuck better watch out or Disney will be using his vaults for storage. The movie schedule alone should bring in billions in free cash flow.

Disney Movie Schedule

July 17, 2015 - "Ant-Man"
Dec. 18, 2015 - "Star Wars: Episode VII - The Force Awakens"
2016 - "The Incredibles 2"
April 29, 2016 - "Captain America: Civil War"
June 17, 2016 - "Finding Dory"
Dec. 16, 2016 - "Star Wars Anthology: Rogue One"
May 26, 2017 - "Star Wars: Episode VIII"
June 16, 2017 - "Toy Story 4"
Late 2017 - "Thor: Ragnarok"
May 4, 2018 - "Avengers: Infinity War - Part I"
2018 - "Untitled Star Wars Anthology Project"
May 3, 2019 - "Avengers: Infinity War - Part II"
2019 - "Star Wars: Episode IX"


After the bell VMWare (VMW) reiterated its forecast for revenue for the June quarter. The company expects to report $1.58-$1.60 billion in revenue and 90-92 cents in earnings. The cash flow will be reduced by a $75.5 million settlement with the Dept of Justice. Shares rallied about $2 on the news in afterhours trading.

FBR downgraded VMW on Monday on "questionable growth potential."


The Container Store (TCS) reported a loss of 11 cents that was less than the 13 cents loss analysts expected. Sales declined -2.1% to $169.8 million because of the West Coast port delays. Same store sales declined -0.9%. That was better than the -3%-4% the company had predicted. TCS guided to full year earnings of 30-38 cents and analysts were expecting 32 cents. Shares rose $1 in afterhours trading.


Jared may have lost 200 pounds eating healthy at Subway but he lost more than that this week. Jared Fogel was taken into custody in a child pornography investigation and Subway quickly ended their relationship at least temporarily with their long time advertising spokesman. The FBI raided his home in Indiana on Tuesday and his computers and electronic gadgets were seized. Back in April the former executive director of the Jared Foundation, an organization that aimed to combat childhood obesity, was arrested on child pornography charges. Jared said he was cooperating with authorities and expects no actions to be forthcoming. Subway is not publicly traded. Jared had been the spokesman for 15 years and Subway said one-third to one-half of their growth over that period was due to Jared's commercials.

Jared's home was raided on Tuesday

Oil prices collapsed over the last several days to an intraday low of $50.58 today. The $2 rebound that followed put crude back into positive territory for the day but the damage was already done.

Crude prices were declining on an unexpected build in inventories last Wednesday, price cuts to Europe by Saudi Arabia, record OPEC production over 32 million barrels per day, a rising rig count in the U.S. and falling demand in China and Europe. While some of those items may be insignificant the total proved to be too much of a weight for prices.

Analysts are now predicting a dip into the high $40s because the July 4th weekend is typically the peak in demand in the USA. Inventories could continue to increase as refiners slow production to match demand.

The strong dollar is also a problem. The dollar index jumped a full point intraday on the Greek headlines and that depresses commodity prices.



Iranian nuclear talks continue as the parties extended their deadline for the fifth time. Friday the 10th is now the deadline for an agreement but participants said they would extend it again as long as progress was being made.

Without a deadline, even one that moves every week, it would be impossible to get anything accomplished with Iran. The six nations said sanctions relief could be delayed another month if a deal is not concluded by Friday. Apparently that is the warning they are giving Iran but there is also an implied carrot. The implications are that sanctions could be lifted early if an agreement is reached. Russian Foreign Minister Sergei Lavrov said there were still about 10 issues separating the sides but an agreement is close. "We are not observing artificial deadlines." Iran will get about $100 billion in funds that had been seized once sanctions are lifted.

One of the serious problems still facing the group is the lifting of the arms embargo against Iran. In 2007 and 2010 the UN imposed an embargo against missile technology sent to Iran that could be used in intercontinental missiles. China and Russia want to lift the embargo so they can sell components to Iran. The western nations do not want to lift the embargo because that just gives Iran a delivery vehicle for their eventual nuclear weapons. It also gives Iran missile technology it can use in the various proxy wars it is currently fighting. When all six nations resolved their differences and presented a united front on the issue the Iranian representatives became very heated and it was a "stormy meeting" according to a state department spokesman.

The current agreement being discussed is about 20 pages but also contains 5 annexes that are secret. Those are the documents that concern me the most. Why does there need to be secret documents covering the most hotly contested sections of the deal?

Markets

The S&P declined -25 points intraday to a low of 2044. That is just 4 points over the low of 2040 set back in March. This is a significant support point and it appears traders jumped the gun in their eagerness to buy the dip. The 200-day average at 2055 was broken severely intraday, which should have been a sell signal, but the dip was bought and the rebound put the index back +26 points above that critical level.

The challenge here is now the 2081-2085 level where resistance was firm over the last week. The S&P closed at 2081 after the rebound came to a screeching halt at that level at 2:30. Once that level was reached there was no further upward progress.

I really do believe the rebound was mostly short covering. The S&P futures are down -4.50 at 8:PM ET. That could be erased before morning or it could double. We never know and the geopolitical headlines will be our curse overnight.

If we do move over the 2085 level I would be a buyer for a trade. If the S&P weakens tomorrow I would eventually expect a retest of the 2040 level in the days ahead. I do not think the Greek disaster is going to be a continued cloud over the market but we have to assume it will be trouble for the rest of the week. Once into next week we will be back to the heated negotiations in Brussels but maybe the ECB will let Greek banks reopen.

Resistance 2081-2085 with support 2055 and 2040.


The Bullish percent Index continues to deteriorate with only 54.6% of the S&P 500 stocks still showing a buy signal on the P&F charts. Internals are still declining despite the strong rebound.


The Dow also rebounded to prior resistance and stalled. There were far more Dow components in positive territory at day's end but quite a few of those were really ugly charts as of Monday. The shorts were forced to cover and a rebound was born.

Given the number of Dow stocks that were strongly positive, I would have expected an even bigger gain for the index. There were 8 stocks with gains of more than $1 and only one with a loss of more than $1. The Dow chart is not bullish despite the rebound and there are plenty of places for a failed rally including the level at the close.

I would be hesitant to use the Dow as my market guide for Wednesday because there is sure to be volatility.



The Nasdaq Composite was down -90 points intraday and returned to positive territory. That is a remarkable accomplishment even though the total gain was only +5 points. The Nasdaq reversed instantly at the support of the 150-day average at 4902.49 with the low of the day 4902.21. You do not get much better correlation than that. The index failed to close back above 5000 despite 90 minutes of trying at the close. This makes the 5000 level initial resistance on Wednesday and 4950 is initial support. If a real move does appear the 5040 level is resistance and the 4900 level is support.



The problem child on Tuesday was the Russell 2000. The support at 1240 broke and the RUT declined to 1225 with the 150-day at 1227. The rebound took it only back to prior support at the 100-day, which is now resistance at 1249.59.

The Russell is no longer leading. It was the weakest link on Tuesday and could easily return to 1230 with a minimal amount of selling. The 100-day was support since December and is now resistance. That is troubling. Until the Russell moves over 1260 I would be careful about adding to longs in this market.


I would be cautious of this market. I do not think the volatility is over and we are sure the Greek headlines will continue for the rest of the week. The FOMC minutes on Wednesday could provide some support if they are dovish but could also be a weight if the Fed was seen as wanting to hike rates no matter what it takes.

Alcoa reports earnings on Wednesday and then the quarter kicks into high gear next week. The earnings could push the Greek news out of the headlines but we need to wait and see how the earnings develop. We are still a long way from a correction and given the market swings over the last several days the uncertainty is strong and conviction weak.

 

INDEPENDENCE DAY SPECIAL!

Welcome to our mid-year Independence Day Subscription Special. Save 50% or more on your subscription!

The options market isn’t waiting for you.  And you shouldn’t wait to keep Option Investor coming at the lowest prices you’ll see until December! There isn’t a minute to spare.  Order now.

Renew for as little as $249
for six months,
ONLY $1.38 per day


 

Enter passively, exit aggressively!

Jim Brown

Send Jim an email

 

If you like the market commentary you have been receiving and you are on a free trial then now is the time to subscribe. Don't wait until you miss a newsletter to decide you want to take the plunge.

subscribe now