Stocks continued to climb last week. The two weeks ago the S&P 500 delivered its best week of the year as it bounced from a -10% correction. This past week the market added another +1.3% as traders seem to be pricing in a Greek win for the pro-bailout (pro-euro) party. It is worth noting that last week's gains were mixed. Liquid big cap stocks in the S&P 500 were drawing more interest than the NASDAQ and Russell 2000 stocks. Expectations for the pro-euro party in Greece to win helped push the euro currency higher and the dollar lower for the last four days in a row. Meanwhile the yield on U.s. ten-year bonds inched lower, which would normally be a sign of smart money seeking safety in U.S. treasuries.

A week ago Friday stocks were rising on speculation and headlines that Spain was going to ask for a bailout for its banks. Last weekend the country did ask for a 100 billion euro rescue package for its banks. Yet investors sold the news on Monday. Spain remained in the headlines throughout the week with Moody's downgrading the country's rating on Wednesday night. This sent yields on Spain's 10-year bond above the key 7.0% level. Yields did retreat ahead of the weekend. Yields above 7% are considered unsustainable and usually precede a country asking for a bailout but thus far the general consensus is that Spain, as a whole, is too big to bailout.

Helping fuel the markets higher this past week were headlines that central banks were planning a coordinated effort to provide liquidity this week should Europe need it following the Greek elections.

Looking at the economic data last week the trend remains weak. Retail sales for May fell -0.2%, which was worse than expected. If you subtract out vehicle sales then May retail sales fell -0.4%. The University of Michigan Consumer Sentiment Survey showed a larger than expected drop. Economists were looking for a pullback from 79.3 to 77.0 but June's reading fell to 74.1. This is the lowest level for the year. The outlook on inflation data was mixed. The Producer Price Index (PPI) saw wholesale inflation drop -1.0% in May, which was bigger than expected. Core PPI prices increased +0.2%. The Consumer Price Index (CPI) fell -0.3% in May and core-CPI prices rose +0.2%. The biggest surprise for the week was the New York Empire State Manufacturing Survey, which plunged from 17.1 in May to 2.3 in June. Analysts were only expecting a drop toward 14. This doesn't bode well for the upcoming Philly Fed survey this week.

Major Indices:

The S&P 500 index spent most of the week churning sideways between 1305 and 1330. Friday's rally has produced a bullish breakout over key resistance at the 1340 level. The next challenge for the bulls is potential technical resistance at the 50-dma (1348). Beyond that is likely resistance near 1360.

Given the current trend, and assuming Greece doesn't implode over the weekend, then it looks like the S&P 500 is headed for 1360.

Daily chart of the S&P 500 index:

The NASDAQ composite is bouncing but it's not showing the same strength seen in the big cap S&P 500 index. The tech-heavy NASDAQ has been churning sideways in the 2800-2880 zone. There is additional resistance at 2900 and then its 50-dma. Last week I suggested that if the NASDAQ Can breakout past 2880 we'll probably see a run toward 2950. That's still a good bet if it can break higher.

Daily chart of the NASDAQ Composite index:

The situation looks similar for the small cap Russell 2000 index. There was no follow through on last Monday's bearish reversal lower. Now after a two-day pop the index is nearing recent resistance (compared to the S&P 500, which has already broken out). That could be a signal that money managers are cautious and putting their money in more liquid, big-cap names. The $RUT has resistance at its exponential 200-dma near 776 and at the 780 level.

A close over 780 would definitely look bullish but the $RUT will need to rally past the new trend of lower highs.

Daily chart of the Russell 2000 index

The major events this week will be the reaction to the Greek elections, the Iran-UN talks, the FOMC meeting, and probably the Philly Fed survey.

It's not on the calendar this week but some time during the month of June we are expecting the U.S. Supreme Court's decision on Obamacare. Odds are high we'll see the results on Monday, June 18th or Monday, June 25th.

FYI: The IMF's quarterly review of Greece has been postponed from the end of May until after the June 17th elections.

Economic and Event Calendar

- Monday, June 18 -
Iran nuclear talks (day 1)
Reaction to Greek elections from Sunday

- Tuesday, June 19 -
Iran nuclear talks (day 2) housing starts & building permits
FOMC meeting begins

- Wednesday, June 20 -
FOMC meeting ends (decision on interest rates)

- Thursday, June 21 -
Weekly Initial Jobless Claims
Existing home sales for May
Philadelphia Fed Survey

- Friday, June 22 -
(nothing significant)

Upcoming events:

June 28-29th, EU summit
mid June 2012, IMF quarterly review of Portugal and Ireland
Supreme Court ruling on Obamacare (in June)

The Week Ahead:

Looking ahead this week will be all about Europe again. On Monday it will be all about Greece. You've heard it a dozen times by now. This Sunday, June 17th, are run-off elections since the most recently elected government failed to form a coalition required to govern. It comes down to the pro-euro (i.e. pro-austerity) parties and the far left, anti-austerity party Syriza. If the pro-euro party wins then they have agreed to abide by the bailout agreements and austerity reforms promised by Greece's previous governments. If Syriza wins then they have promised to throw out the prior bailout agreements, which would most likely lead to a quick exit from the Eurozone.

Recent polls have the two parties running neck and neck. With so much at stake it is a bit surprising to see the U.S. stock market rising into the weekend. Here's one spin on the situation. If the pro-euro party wins then any immediate shocks to the euro will subside. We'll be back to the status quo, which isn't great but stocks could see a relief rally. Eventually, down the road, we'll be going through these challenges again with Spain (and possibly Italy) unless the Eurozone takes some drastic measures and Germany decides to commit their checkbook into saving the euro.

On the other hand if the Syriza party wins then the European Central Bank (ECB), along with other central banks, immediately provide necessary "liquidity" to prop up the region. There could be a quick announcement of more QE in Europe and possibly the U.S. to soften the blow of what will likely be a messy exit of Greece from the Eurozone. There is talk of one trillion euros worth of liquidity being made available in Europe. Who knows how much QE they would agree to if Greece decides to leave the euro. However, the stock market tends to rally on news of new QE programs so stocks could rally.

Thus it seems like a win-win for the stock market no matter what party wins in Greece. If the pro-euro party wins, then status quo, and that's a win. If the anti-euro party wins, then likely QE programs, and that's a win. At least that's the theory. We could just as easily see the market's crash. If Syriza wins, then stocks crash on an imploding euro currency and rising dollar and the threat of a domino-like fall of not just Greece leaving the euro but also Spain, Portugal, and possibly Ireland and Italy. If the pro-euro party wins, then traders could end up "selling the news" just like they did last Monday on the bank bailout news for Spain. If doesn't matter if you're bullish or bearish there is a theory that works for you.

At the moment (Sunday evening) it looks like the "New Democracy" pro-euro party has won the majority vote in Greece but it was a close race. The New Democracy party garnered 29.7% of the vote. Syriza won 26.9% and PASOK Socialists won about 12.3%. We'll have to wait and see if stocks rally on this news or if traders choose to sell the news. Overall it's a bullish event but you have to keep in mind that this new government will only have a couple of weeks to form a working coalition. If not, there will be another round of elections in 30 days. Although if that happens, Greek could go bankrupt again before the next election. Greece has another debt payment due and they're broke. They can only pay it with the next EU/IMF/ECB bailout payment. If you are the EU/IMF/ECB, would you forward Greece their next multi-billion euro rescue payment when the current government isn't strong enough to form a coalition?

Elsewhere in the world we'll see headlines about Iran as they meet with the U.N. security council early this week to discuss their nuclear program. The U.N. wants them to stop but Iran has pledged that they won't so the talks are largely a waste of time. The EU oil embargo is scheduled to go into effect on July 1st. This could cut Iran oil sales by up to one million barrels a day.

One of the key events this week will be the FOMC meeting, which concludes on Wednesday. The Fed's next move will be interesting. Normally the Federal Reserve does not like to make any policy moves during an election year for fear of being seen as helping the current administration. We only have about 140 days left before the upcoming U.S. presidential elections. Currently the Fed's Operation Twist is scheduled to close at the end of June. Many suspect the Fed will extend Operation Twist. Yet both the U.S. and global economic data are showing signs of a global slowdown. Will the Fed choose to act now and get ahead of the slowdown or will they wait until after the elections?

We are quickly approaching the earnings-warning season, which is just prior to earnings-announcement season. Given the worldwide slowdown you might expect that we'll see a larger number of earnings warnings, which could dampen market sentiment and send stocks lower. In mid July we'll kick off the Q2 earnings season. Corporate guidance and earnings results could play a huge part in which direction stocks move for the third quarter.

On a short-term basis I am encouraged by the bounce in stocks and the Greek vote. However, I'd like to see some follow through in equities. The NASDAQ and the Russell 2000 index have yet to breakout past key resistance levels. Stay cautious. It could be a volatile Monday morning.

- James