Stocks ended the holiday-shortened week on a sour note. Worries about the Greece situation are rising as the country is quickly running out of time to work out a deal with its creditors. Early last week Greece warned they could miss their next debt payment. That was just one factor in Tuesday's sharp decline. Believe it or not but better than expected economic data in the U.S. on Tuesday also contributed to the market's sell-off. Investors were interpreting stronger economic numbers as potential fuel for the Fed to raise rates. It looks like Tuesday's outbreak of improving economics was quickly washed away by disappointing economic results the rest of the week.

All of the major U.S. indices posted losses for the week. Nearly all of the industry groups posted declines as well. One exception was the semiconductor industry. The SOX index rallied +3.5% thanks to M&A news and speculation. Avago (AVGO) announced a $37 billion deal to buy Broadcom (BRCM). There are also rumors that Intel (INTC) might buy Altera (ALTR) for $15 billion. Theses headlines boosted semiconductor stocks.

Crude oil was another exception. A rally in the U.S. dollar last week pressured commodities lower. Somehow crude oil eked out a gain after a volatile week of trading. Oil had plunged to new six-week lows on news that Iraq's oil exports could surge +26% in June. Then suddenly oil reversed higher after the weekly Baker Hughes rig count showed another decline. The combined oil and gas count showed another 10 rigs were shutdown. We've fallen from 1,931 in late 2014 to 875 active rigs today.

Economic Data

U.S. new home sales rose +6.8% in April to an annual pace of 517,000. The March reading was revised higher from 481K to 484K. Plus the National Association of Realtors said their pending home sales index rose +3.4% in April to the highest level in nine years. This index is up +14% from a year ago. The Northeast region saw the biggest improvement with a +10% surge in contracts signed to buy an existing home.

Unfortunately the Chicago PMI has retreated back into contraction territory. Numbers below 50.0 suggest economic contraction and May's reading dropped from 52.3 to 46.2. Economists were expecting 53.0. This is the third time in the last four months that the Chicago PMI has been under 50.0. The most recent report showed the employment component falling to its lowest level since April 2013.

Another disappointment was the consumer sentiment numbers. The initial May reading on consumer sentiment was 88.6. The final sentiment reading had improved to 90.7 but that's still a drop of -5.2 points from April and a six-month low.

Speaking of lows, the Q1 GDP estimate on U.S. growth was revised down from +0.25% to -0.75%. It's the first time the GDP number has been negative since the first quarter of 2014 when GDP fell -2.1%. This is also the third time since the current economic expansion began back in June 2009 that the U.S. economy has contracted.

There are still plenty of analysts that expect the economy to bounce back in the second quarter and the average estimate is around +2.0% growth. That's significantly higher than the Atlanta Fed's current estimate of only +0.8% growth in the second quarter. If the Q2 number surprises to the downside we could actually be in a recession, which is technically two negative quarterly GDP readings in a row.

Overseas Economic Data

The United States is not the only country with a receding economy. Canada just reported its Q1 GDP plunged from +2.2% growth in the fourth quarter to -0.6% growth in the first quarter. It was the first negative reading since Q2 2011 and the worst drop since 2009.

Looking east toward Asia the country of Japan said their monthly household spending numbers plunged from +2.4% in March to -5.5% in April. Their industrial production numbers improved from -0.8% to +1.0% last month. Traders in Japan are ignoring some of the disappointing economics. The Japanese NIKKEI index is up 11 days in a row, which is the longest winning streak in 27 years.

The Chinese stock market is showing a lot more volatility. The Shanghai Composite is up +140% in the last twelve months. Months ago the rules changed that allowed more and more people to open up brokerage accounts. Money has been flooding into the Chinese market. Margin debt in the Chinese market hit a record two trillion yuan last week. Suddenly stocks reversed. On Thursday morning three brokerage firms raised their margin requirements and the Chinese Shanghai index plunged -6.5% in one session. The market lost another -4% on Friday before paring most of its losses for the session. Imagine how U.S. investors would feel if we saw the NASDAQ composite plunge -500 points to 4,500 in less than a day and a half.

Greece

Most of the news out of Europe last week was focused on Greece. There was a three-day G7 meeting for finance ministers in Germany. U.S. Treasury Secretary Jack Lew was there. He warned that Europe is risking a global market "accident" if they let Greece default. Mr. Lew said, "There is great uncertainty in there at a time when the world needs greater stability and certainty."

Early last week Greece warned they may not be able to make their debt payments to the IMF in June. This weakened equity markets in both Europe and the U.S. However, by the end of the week, Greece's Economy Minister Giorgos Stathakis said they will make the next payment of 304 million euros on Friday, June 5th. Unfortunately there is no clarity on how the country will make the rest of its 1.5 billion euros worth of payments to the IMF due in June. They have a €300 million payment due on June 12th, a €558 million payment due on June 16th, and a €335 million payment due on June 19th. Plus, they owe another €6 to €7 billion (with a B) to the ECB in July and August.

Comments from International Monetary Fund Managing Director Christine Lagarde helped generate concern when she said it is possible for Greece to leave the Eurozone.

Derick Halpenny, an analyst at Bank of Tokyo Mitsubishi, commented on the idea of Greece leaving the euro and said, "[it] would probably mark the beginning of the end of the single currency. In an instant the euro would change from an irreversible single currency to some form of exchange rate mechanism that countries can abandon. Once a template for departure is set, a cloud of uncertainty would persist for a very long time."

Analysts at Bank of America Merrill Lynch and at the Royal Bank of Scotland have expressed their opinions that if Greece misses a payment to the IMF it does not automatically mean a technical default or an immediate exit from the euro. Greece would probably have a grace period (I have heard a one month and a two month grace period) to catch up on their debt payment. They would likely need to implement capital controls to stop depositors from pulling money out of Greek banks and crashing the system.

They may be too late on that last point. Private citizens have been pulling money out of Greek banks for months. They only reason they're still open (the banks) is due to help from the ECB. Deposits have fallen about 100 billion euros.

Bloomberg Chart of Greek bank deposits





Major Indices:

The S&P 500 index snapped a three-week winning streak with last week's -0.88% decline. Year to date the index is up +2.3%. It's also back below prior resistance at the 2,120 level.

If the 2,100 mark and its 50-dma fail to hold up as support then we can look for a drop toward likely short-term support at 2,080. Below that the 200-dma near 2,040 should offer some support.

Five-Day chart of the S&P 500 index:

chart of the S&P 500 index:

Wednesday's rally in the NASDAQ composite set a new 15-year closing high above the 5,100 level. Too bad it could hold these gains. The NASDAQ ended the week down -0.38%. This puts the year to date gain at +7.0%.

The 5,100 area is round-number resistance. If this index does manage to rally we can look for additional resistance near 5,150 and 5,200. On the other hand, if the market retreats, then 5,000 and the 4,900 levels are potential support.

chart of the NASDAQ Composite index:

The small cap Russell 2000 index also broke a three-week winning streak with last week's decline. The index lost -0.45% but it looks like it's trying to hold support near 1,240. Obviously this level didn't hold on last Tuesday's spike lower. There is clearly a trend of lower highs. Bears could argue that May's failure near 1,260 is a new lower high.

I wouldn't be too quick to call a top in the $RUT. The big drop in the last week of April did do some technical damage but the trend on the $RUT isn't completely broken.

The next couple of weeks could determine its direction. The 1,260-1,280 zone is overhead resistance while the 1,200-1,220 region should offer support.

chart of the Russell 2000 index



Economic Data & Event Calendar

It is the first week of a new month and that means lots of economic data both here in the U.S. and abroad.

Big reports overseas include the Eurozone PMI data, the ECB's interest rate decision and the ECB President's press conference. Late in the week will bring the Eurozone GDP estimate and an OPEC meeting.

Here at home investors will be focused on the labor market. The ADP report comes out on Wednesday and economists are expecting an improvement from April's +169,000 private sector jobs to rise to +192,000 in May. Current estimates on the government's nonfarm payroll number are around +220,000 new jobs.

- Monday, June 1 -
Personal Income & Spending
ISM index
Eurozone PMI data

- Tuesday, June 2 -
Factory Orders
Car and truck sales

- Wednesday, June 3 -
ADP Employment Change Report
ISM Services index
Federal Reserve Beige Book report
ECB interest rate decision
ECB President Mario Draghi press conference
Eurozone services PMI
Eurozone retail sales

- Thursday, June 4 -
Bank of England interest rate decision

- Friday, June 5 -
OPEC meeting
Eurozone GDP estimate
Nonfarm Payrolls (jobs) report
Unemployment rate

Looking Ahead:

The month of June does not have the best record for stock market performance. If you were going to take a month off from active trading then this would be the month choose. June is the worst month of the year for the big cap indices. The first day of the month has an abnormally high history of being negative.

If you do a little digging you'd find that the Dow Jones Industrial Average has been down eight out of the last ten Junes. The NASDAQ composite is down seven out of the last ten with an average decline of -0.9%. The S&P 500 is down six out of the last ten with an average loss of -1.3%.

Looking at the big picture we see the U.S. economy and the Chinese economy are both slowing down. Japan and Europe's economies are growing very, very slowly but they are showing improvement after big declines last year. Of course Japan and Europe have both launched massive QE programs to try and stimulate their economies and drive their currencies lower to fuel exports. China is also trying to stimulate their economy. The U.S. is the only one that's actually looking to tighten monetary policy and raise interest rates.

The good news is that the Federal Reserve is aware that the global economy is impacting the U.S. Chairman Yellen recently said, "If foreign growth is weaker than anticipated, the consequences for the U.S. economy could lead the Fed to remove accommodation more slowly than otherwise." Translation: the fed will delay raising rates.

I suspect the next two or three weeks will be all about Greece. They claim they will make their debt payment on June 5th but what about the next week or the week after that? They need a deal or they will default by the end of summer and we could see them leave the Eurozone before the year is over. The good news is that the global banking system has had years to prepare for a potential Greek exit so it would be a lot less damaging today than a few years ago. However, a Grexit could still generate huge volatility in both the bond and equity markets.

~ James