It's Oscar time with the Academy Awards on Sunday. The award for the most headline-generating, market-moving, story that won't go away is Greece's soon to be default that isn't a default. A gut-wrenching tragedy about a tiny Mediterranean country with less than twelve million people captivating the global markets in a slow-motion debt meltdown fraught with political upheaval and social unrest. It's a no-win situation as Greece tries to satisfy the Troika's austerity requirements while avoiding anarchy in the streets. Will the latest 130 billion euro bailout bring peace and put this tragedy behind us? Or will Greece once again fail to live up to its budgetary obligations and spending cuts? Stay tuned for the next exciting sequel, "Greece: Living Beyond Bailouts" coming to you soon in 2012.
The Academy won't be handing any awards out to Greece or its best supporting actors the EU, IMF or ECB but the group continues to get a lot of press. After weeks and months of wrangling EU leaders finally agreed to a new 130 billion euro bailout package for Greece. Unfortunately this is a fragile victory. Greece still has to hammer out its "voluntary" haircut for private sector investors holding their bonds. Plus, Germany and other EU countries funding this bailout have to approve this action with a vote by parliament. There are still plenty of hurdles for this bailout package to jump over and we're quickly running out of time before Greece's March 20th deadline for a $19 billion debt payment.
The U.S. markets greeted the new Greek bailout news with a yawn. Stocks opened on Tuesday with gains but eventually faded into declines as investors seemed to sell the news. The Dow Industrial average struggled with overhead resistance at the 13,000 level all week long and closed Friday at 12,982. This is still the highest level for the Dow Industrials in four years. Both the NASDAQ composite and the S&P 500 index continue to levitate inside their narrow bullish channels (see charts below). The NASDAQ remains at ten-year highs and the S&P 500 is hovering just above its 2011 closing high.
It proved to be a bullish week for commodities thanks to renewed weakness in the U.S. dollar. The greenback fell to new three-month lows. Gold prices reciprocated with a rally to three-month highs. Silver is breaking out from a four-week trading range. Yet oil was the real winner. Crude oil prices surged thanks to the dollar weakness and rising tensions with Iran who cut off exports to Britain and France last week. Oil prices settled the week at $109.76 a barrel yet oil hit record highs when priced in euros. Overall the trend for stocks is still up but trading volumes continue to sink with big board volume falling to multi-year lows.
Economic news proved to be another mixed bag. There were a number of PMI manufacturing data reports released last week. Numbers above 50.0 indicate growth while numbers under 50.0 suggest contraction. Germany saw its PMI fall from 51.0 to 50.1 so it's just barely holding up in the "growth" category. France saw its PMI improve from 48.5 to 50.2. The Eurozone total PMI inched up to 48.8 to 49.0. Meanwhile China saw its PMI climb from 48.8 to 49.7. China also made news last week when the government cut the banks reserve ratio requirement again. This move is an effort to stimulate their economy and the Shanghai stock market rallied every day last week. Back in Europe the EU lowered their 2012 GDP forecast from growing +0.5% to slowing -0.3% as the region deals with the impact of so many countries focused on austerity measures.
Economic data in the U.S. generally better. Existing home sales were probably the biggest disappointing with the annual pace of existing home sales coming in at 4.57 million versus estimates at 4.63 million. New home sales showed improvement at an annual pace of 321,000, which was better than expected. January isn't a big month for home sales and the pace of sales is up +3.5% year over year. Another big positive in the report was a drop in inventory levels to 5.6 months, which is the lowest level since early 2006.
The weekly initial jobless data came in at 351,000, which was unchanged from the prior week but it brought the four-week moving average down to 359,000 and the lowest reading since March 2008. Another positive economic report was the University of Michigan Consumer Sentiment survey, which rose from the early February reading of 72.5 to end the month at 75.3. This is a 12-month high and a far cry from the August lows of 55.7. Analysts like to suggest that positive consumer sentiment translates into positive consumer spending, which fuels nearly 70% of the U.S. economy.
The S&P 500 index continues to drift higher. Traders bought the dip near the bottom of its narrow rising channel and its simple 10-dma. Friday's close at 1,365 is above the 2011 closing high of 1,363 so technically the index is at new three-year highs but it has yet to conquer the 2011 intraday high near 1,370.
Is this index overbought? Absolutely! Can it grow more overbought? Yes, it can. The trend is up and with the S&P 500 near the bottom of its channel it could be a bullish entry point for very short-term traders. Odds are growing every day for a correction. I mentioned last week that in a bull market environment corrections tend to be in the -3% to -5% range. That would mean a dip into the 1,324 to 1,296 area. Personally, I would look for potential support near 1,340, at 1,320, and at 1,300.
A normal 38.2% Fibonacci retracement of the December low to current highs would mean a dip toward 1,305. If the market corrects should we expect a straight drop to these levels? Probably not but stocks do tend to move faster going down than going up.
If stocks continue to shrug off any concerted selling pressure then the next level of overhead resistance, once past the 2011 highs, is likely the 1,400 mark with a potential pause near 1,380.
Daily chart of the S&P 500 index:
Monthly chart of the S&P 500 index:
Thanks again to gains in shares of Apple (AAPL) the NASDAQ continues to drift higher. The index has been bouncing along its rising 10-dma and it violated this short-term technical resistance on Thursday morning but quickly recovered. Friday's close leaves the NASDAQ at new multi-year highs.
A normal -3% to -5% correction would mean a dip into the 2,874 to 2,815 range. I would expect the prior 2011 highs to act as short-term support, which means the 2,860-2,840 zone could slow any descent. While a normal 38.2% Fib retracement of the current rally would mean a pull back toward the 2,800 level.
Can the NASDAQ continue to climb? Of course it can but the farther it climbs the bigger the correction could be. I would not be surprised to see the 3,000 level act as overhead, round-number, psychological resistance. A -5% pull back from the 3,000 level would be 2,850.
Daily chart of the NASDAQ Composite index:
Monthly chart of the NASDAQ Composite index:
The small cap Russell 2000 index has spent the last few weeks consolidating sideways. That's not necessarily a bad thing. The longer it consolidates sideways it can work off its overbought condition. Right now if the $RUT were to breakout from the top of this roughly 810-832.50 trading range it would be a very bullish signal for stocks. Such a move would also breakthrough the trend line of lower highs on the weekly chart.
If the market does correct then the $RUT will likely underperform. Instead of looking for a -3% to -5% pullback I would expect a -5% to -10% pullback. This would mean a dip back into the 802 to 785 zone.
Daily chart of the Russell 2000 index
Weekly chart of the Russell 2000 index
Unfortunately the recent weakness in the transportation index remains a concern. Thursday's intraday bounce fuels hope that the correction in the transportation sector is over but there needs to be follow through and Friday's pullback from the intraday high was not inspiring. A rally past the $TRAN's simple 10-dma or its trend line of lower highs would be another bullish signal for stocks.
Daily chart of the Transportation Average
The economic calendar picks up speed again as we head toward the end of February and the beginning of March. The ISM manufacturing index will be a good look at business activity in the U.S. Meanwhile the Fed's Beige book report provides anecdotal evidence of conditions across the twelve districts. The second estimate for the U.S. Q4 GDP is expected to rise to +3.0% growth. Of course most of the headlines will probably be overseas. There is a G20 meeting in Mexico this weekend. Monday morning could see headlines from the G20.
There is an EU finance ministers meeting on Wednesday and another EU summit on Thursday. The big event for the week could be the ECB's second round of LTRO 1% money loan program. Previously there were estimates that the ECB could loan upwards of one trillion euros on Wednesday but estimates are now falling into the 250 to 500 billion euros. If the result is more than 500 billion euros it could be seen as a negative on the health of European banks.
- Monday, February 27 -
pending home sales
- Tuesday, February 28 -
durable goods orders
Case-Shiller 20-city Home Price index
Consumer Confidence for February
- Wednesday, February 29 -
ECB's 2nd round of LTRO 1% money
EU finance ministers meeting
Q4 GDP (second estimate)
Federal Reserve's Beige Book report
- Thursday, March 1 -
Weekly Initial Jobless Claims
EU Summit Meeting
Personal Income and Spending
ISM (manufacturing) index
vehicle sales for February
Additional key dates coming up:
Mar. 9th, non-farm payroll (jobs) report for February
Mar. 20th, Greek deadline for $19 billion debt payment
The Week Ahead:
I've got my fingers crossed that last week's announcement of a new 130 billion euro bailout for Greece will push this problem to the back burner for a while. However, there are several challenges this deal has to overcome before it's done. Germany and Finland's parliaments have to vote in favor of the rescue package. Plus, Greece still has to complete its haircut on current bondholders, which might fail and spark the credit default swap fire everyone has feared. There are just over three weeks left until Greece has to make that March 20th $19 billion debt payment. Of course if they restructure their bond debt that could change.
The last couple of weeks have seen an increased focus on rising oil and rising gasoline prices. The big worry here is that surging gasoline prices could slam the brakes on any improvement in the U.S. Analysts are expecting gas to hit $4.00 a gallon in the next few weeks and it could be as high as $5 a gallon by midsummer. At $4 a gallon it's taking money out of consumers' wallets that could have been spent elsewhere.
The situation with Iran and the West is not improving. There was a new report out this past week from the UN Atomic Energy Agency outlining concerns over the possibilities that Iran could use its nuclear program for bomb making. We can expect this situation to heat up as we approach summer. Of course gas prices normally rise into summer as well. With oil as Iran's major export and biggest percentage of the government's revenues it's in the country's best interest to fuel fears of a conflict.
In other news the Economic Cycle Research Institute made headlines. Their spokesman Lakshman Achuthan reiterated their U.S. recession call first made about five months ago. The ECRI's leading indicators index has been improving but the group still believes that slowing GDP growth, falling personal income and industrial production are all signs that point to a recession sometime this year. Achuthan claims that in the last 50 years every time we've seen a decline like this, in these indicators, it has always led to a recession.
Big picture the trend for stocks is still up but we're overbought with the market's nearly non-stop rally from its mid December lows. We don't want to fight the trend but we don't have to allocate capital at current levels either. More aggressive traders could buy a breakout past the S&P 500's 2011 intraday highs near 1,370 but the safer bet would be to wait for a significant correction and then consider new bullish positions on the bounce.
If the transportation sector can rebound and the small cap Russell 2000 index can breakout from its trading range then I would feel more confident about launching new bullish trades.