Geopolitical risks from Iraq and Russia failed to slow the stock market's march higher last week. Generally bullish economic data and a friendly Federal Reserve helped boost the market's advance. The S&P 500 large cap index closed at a record high while the NASDAQ composite closed at 14-year highs. Geopolitical issues helped generate a fear trade in precious metals with gold up +3.3% for the week to close at $1,316 an ounce. Silver surged +6.6% to close near $21 an ounce. Crude oil remains high at $106.81 a barrel. Yet there was no fear in the equity markets with the volatility index (VIX) falling to a new seven-year low, closing under 11.

The week started with Russia and Ukraine failing to agree on a price for natural gas and Russia's OAO Gazprom, the country's largest energy producer, cut off natural gas supplies to Ukraine. Meanwhile in Iraq the fighting continues with ISIS insurgents laying siege to the country's biggest oil refinery, north of Baghdad. The equity markets shrugged off these events and stocks continued to drift higher ahead of the FOMC meeting.

The two-day FOMC meeting concluded on Wednesday. As expected the Fed tapered their QE program by another $10 billion, reducing their monthly asset purchases to $35 billion. The Federal Reserve also released their latest economic forecasts and cut their 2014 GDP estimate from 2.9% to 2.3% growth. Fed Chairman Janet Yellen soothed investors worries saying that even after the Fed ends its QE program they would likely keep interest rates extremely low for an extended period of time.

The market surged higher following the Fed's announcement, likely due to some short covering. Hedge funds are not having a good year and many are short the S&P 500 and the small cap Russell 2000, which has not been a very good trade. Meanwhile the AAII bullish sentiment weekly survey plunged with its biggest drop since January. Normally new market highs tend to fuel bullish sentiment so this was a surprising drop.

Economic Data

Overall the economic data last week was encouraging. The New York Empire State manufacturing index hit its highest level since 2010 with an improvement from 19.0 to 19.3. The Philadelphia Fed survey improved from 15.4 in May to 17.8 in June. Industrial production improved +0.6% in May following a -0.3% drop in April. The Consumer Price Index (CPI) rose +0.4% in May following a +0.3% rise in April.

Data out of the residential real estate industry was mixed. Homebuilder sentiment improved from 45 to 49. Yet housing starts plunged -6.5% in May to an annual pace of 1.001 million. The drop was fueled by a -5.9% decline in housing starts for single-family construction.

Overseas Data

Data was mixed overseas. Great Britain said their retail sales fell -0.5% last month, which was worse than expected. Germany reported their PPI wholesale inflation gauge dropped -0.2%. Spain said their industrial new orders climbed +6.9%, which was ahead of expectations. Italy also saw a +3.8% gain in their industrial new orders last month. Unfortunately Italy is still struggling with a recession.

Japan reported their exports dropped -2.7% year over year, which was worse than the -1.3% expected. China said their housing prices rose +5.6% year over year, which is a decline from the prior reading of +6.7%. The Moody's rating agency said the slowdown in China's property market could negatively impact China's GDP. An official from the People's Bank of China countered saying a pullback in their housing market would be reasonable.





Major Indices:

After a three-day pullback in mid June the S&P 500 is now up six days in a row. Last week's rally added +1.38%. Year to date the index is up +6.2%. The breakout past potential resistance at 1950 should set up for a run towards round-number resistance at the 2,000 mark.

The 1980 level could be short-term resistance but we are so close to the 2,000 level it will act like a magnet. Getting past the 2,000 area could be a challenge. If something were to spark some profit taking we can look for support at 1940 and 1920.

chart of the S&P 500 index:

Weekly chart of the S&P 500 index

The NASDAQ composite added +1.3% last week, pushing its year to date gain to +4.5%. You can see on the daily chart how it bounced from short-term support along its simple 10-dma. The index ended the week at a new 14-year closing high but remains just under resistance in the 4,371 area.

Looking ahead, if this rally continues, the 4400 and 4500 levels will probably be round-number resistance. If stocks see a pullback the NASDAQ should find support near 4300 and 4250.

chart of the NASDAQ Composite index:

Weekly chart of the NASDAQ Composite index

The small cap Russell 2000 index ($RUT) also found support at its rising 10-dma. The bounce pushed it through resistance at 1180. Last week's +2.2% gain lifted the index into positive territory for the year (+2.1%).

The 1200 level and the 2014 highs near 1210 are overhead resistance. Investors can watch for short-term support at 1180 and 1160.

chart of the Russell 2000 index



Economic Data & Event Calendar

It is another relatively quiet week for economic data. The Chinese HSBC PMI manufacturing number on Sunday will be watched. It has been stuck under the 50.0 mark for months. In the U.S. we'll see more data on residential home sales. Plus we'll hear the latest consumer confidence and consumer sentiment survey numbers. Midweek will be the third estimate on U.S. Q1 GDP growth. The first estimate was +0.1%. That was revised lower to -1.0%. Now Moody's is estimating a -1.9% as the third reading.

Economic and Event Calendar

- Monday, June 23 -
Existing home sales for May
Eurozone PMI manufacturing data

- Tuesday, June 24 -
Case-Shiller 20-city home price index
Consumer Confidence survey
New Home Sales data

- Wednesday, June 25 -
Durable Goods Orders
Q1 GDP growth (third estimate)

- Thursday, June 26 -
Weekly Initial Jobless Claims
Personal Income & Spending

- Friday, June 27 -
University of Michigan Consumer Sentiment Survey

Additional Events to be aware of:

July 3rd, U.S. markets close early
July 4th, U.S. markets closed for holiday

Looking Ahead:

Iraq

Looking ahead we are still more than two weeks away from Q2 earnings season. The market might focus on geopolitical headlines and that could be bad news. Iraq remains a quagmire and the government is requesting aid in the form of airstrikes against ISIS insurgents. President Obama said he will consider airstrikes if necessary and announced we are sending 300 "military advisors" (a.k.a. special forces) instead. There has been a lot of speculation about what these 300 men are supposed to accomplish. Some have suggested they are going to help pack up the $1 billion U.S. embassy (they should call it a fortress) before the U.S. pulls out its remaining personnel. If the U.S. does leave completely it's a bad sign for the future of Iraq.

The situation is Iraq is getting worse and it's starting to look like Iraq will not survive from this conflict in its current form. We could see three new "countries" emerge with one country in the north controlled by the Kurds, one country in the middle controlled by Sunnis, and one country in the southeast controlled by Shias.

Mike Shedlock noted some "Absurd and Conflicting Realities" on his blog on Friday. Here is his list:

  • The US wants to overthrow Syrian president Bashar al-Assad.
  • US ally, Saudi Arabia, also wants to overthrow the Syrian president.
  • The rebels fighting Assad are primarily Al Qaeda and Isis. Thus the US is in alignment with Al Qaeda and Isis.
  • The US and Iran want Isis out of Iraq.
  • The US refuses help from Iran out of fear of making Iran and Iraq allies.
  • Iran supports Syrian president Bashar al-Assad.
  • Saudi Arabia is ruled by Sunnis.
  • Isis consists primarily of extreme Sunnis.
  • Iran is ruled by Shias.
  • The US overthrew Saddam Hussein, a secular ruler whose party was dominated by Sunnis.
  • The US helped install Nouri al-Maliki, who is a Shia, even though the US is at severe odds with Iran.
  • Maliki is politically aligned with Iran.
  • Under Maliki's regime, extreme Sunnis got fed up with political oppression, giving rise to Isis.
  • Maliki accuses Saudi Arabia of sponsoring Isis and genocide.

Mike has a lot more information. You can check out his post here.

If you're never heard of the ISIS rebels in Iraq then here's a detailed list to get you up to date: 16 things you need to know about the ISIS

If you are in a rush and just want the highlights then here is a quick, four-minute video explaining the current conflict in Iraq. 4-minute Video

Ukraine-Russian Conflict

Ukraine could return to the headlines as a potential market moving event. The new Ukraine president has announced plans for a 10 kilometer "no man's land" along its eastern border with Russia while also declaring a unilateral cease-fire as they try to negotiate with the pro-Russian rebels. The Ukraine rebels suffered heavy losses last week so they might be willing to talk. Unfortunately Russian President Putin is stirring up more trouble by sending tens of thousands of troops back to the Ukraine border. This follows last Monday's deadline for Russian energy company Gazprom to cut off natural gas supplies to Ukraine.

Putin is also sticking his nose into the Iraq crisis. Iraqi leader Nouri al-Maliki has been asking for help from Iran to fight the Sunni rebels. The U.S. does not want Iran to have any more influence in Iraq. The U.S. has essentially said they want Maliki to step down since he has done such a terrible job governing his country. Maliki has refused to step down and now Putin has offered his support to help Maliki fight the insurgents.

As Russia sends more troops toward the Ukraine border the U.S., Canada, France, and Germany have warned Russia they will announce tougher sanctions if Putin doesn't deescalate the situation in Ukraine.

Argentina

We could have another country making headlines this week. That would be Argentina. Back in 2001 the country defaulted on almost $100 billion worth of government bonds. They managed to negotiate with most of their bondholders with a debt restructuring in 2005 and 2010. These bondholders took a 70 percent haircut on their investment. Yet a few bondholders have never agreed to anything less than full payment. These holdouts, or as Argentina calls them, bond "vultures", are led by U.S. hedge funds.

This past week the U.S. Supreme Court rejected an appeal from Argentina over a recent court decision that says the country has to pay both the bondholders who agreed to the restructured debt and the bondholders who did not agree (the holdouts). Argentina admitted on Wednesday that they can't afford to pay both and would miss its payment due on June 30th. Standard & Poor's followed this news by downgrading Argentina's credit rating two notices to triple C- on worries the country will default. Argentina will have a 30 day grace period after the June 30th deadline before technically defaulting.

The Argentine government has threatened to move the entire issue to Argentine law, which would allow them to circumvent the U.S. court orders. Yet doing so would severely damage their credit standing. The country has been locked out of the global lending markets since 2001 and they would love to start selling bonds on the world market again.

In other news a professor at Harvard business school has issued a warning about the current stock market rally. Matthew Rhodes-Kropf warns that the surge in merger and acquisition activity is a sign the market rally is peaking. He claims the last five "great merger waves" in the market all preceded a peak and a major downturn in equities. The current pace of M&A activity will hit $3.51 trillion in 2014. That's the highest since 2007, right before the 2008 bear market.

We are about three weeks away from Q2 earnings season. That tends to be an inflection point for the market each summer. It could be a top for the market or better than expected earnings news and guidance could launch stocks into the next leg of a summer rally. Currently analysts are expecting +7.1% earnings growth in the second quarter. That is up significantly from Q1's +3.5% earnings growth. Let's hope Wall Street isn't too optimistic here and sets the market up for a sell-off on disappointing numbers.

On a short-term basis we only have six more trading days left in the second quarter of 2014. Normally you might think stocks would see some end of quarter window dressing, especially with the market hitting new highs. However, the week after June option expiration has been down 21 out of the last 24 years. That's a pretty strong record. I would be cautious on launching new bullish positions this week.

James