Last week was all about Greece. This little country of eleven million people is the financial headline that won't go away. It was a holiday-shortened week with the U.S. market closed last Monday for President's day. Three of those four days saw the S&P 500 index drift sideways as investors waited for some sort of resolution to the Greek problem. Stocks initially sold off on Friday morning over conflicting headlines regarding negotiations with Greece and a story that the European Central Bank was preparing for Greece to leave the Eurozone. That proved to be false. By Friday afternoon a resolution between the Eurogroup and Greece had delivered a four-month loan extension.

Stocks rallied on the loan-extension headlines and the major U.S. indices raced to new highs. The Dow Industrials, S&P 500, and the small cap Russell 2000 index all ended the week at new record highs. Meanwhile commodities are still underperforming. The U.S. dollar churned sideways but that didn't stop new declines in gold (-2.0%) and silver (-6.2%) last week. Crude oil retreated as well and that weighed on most of the oil and oil service stocks. Meanwhile the U.S. bond market sank, which lifted the yield on the 10-year note to new seven-week highs (up three weeks in a row). The yield closed at 2.1%.

Greek Debt Crisis

It seems like the stock market has been reacting to the twists and turns of the Greek financial tragedy ad nauseam. Sadly, Friday's new accord has merely kicked the can down the road another four months until the end of June. Here's a quick overview of what happened last week.

Early last week there were rumors that Greece was going to ask for a loan extension. This rumor was confirmed on Tuesday. Then on Thursday Germany rejected Greece's proposal for the loan extension. That left things tense on Friday. In the end, Greece's new government proved to be all bark and no bite as they caved in to almost all of the troika's demands.

The EU, ECB, and IMF (a.k.a. the troika) will be supervising Greece over the next four months to make sure the country fulfills its requirements to meet the budget and austerity measures outlined in current bailout. Greek voters are probably shocked since the current government won the recent election on the grounds they would do away with austerity. It's probably not too surprising to see politicians taking the easy road. The best decision is probably leaving the euro, which would be very painful short-term but healthier long-term. Maybe the new Greek government sees staying in the Eurozone as the lesser of two evils. They can still leave the Eurozone down the road if they want to.

Friday's agreement should give the markets some breathing room and move Greece to the backburner for another two or three months. In effect it's short-term bullish for stocks.

Economic Data

Economic data in the U.S. last week was mostly negative. New housing starts saw their December number revised down from 1.089 million to 1.087 million. January's housing starts slipped to an annual pace of 1.065 million. Meanwhile the NAHB housing market index, a confidence survey, inched down from 57 to 56 (on a scale of 0-100).

The wholesale look at inflation in the Producer Price Index declined -0.8% in January following an upwardly revised +0.2% reading in December. Most of January's drop was a reaction to plunging energy prices, namely gasoline. Excluding food and energy we still saw the core PPI decline -0.1%.

Business activity in the U.S. has been slowing down. Industrial production in December was revised lower to -0.3% and January's only showed a +0.2% increase. The New York Empire State fed survey declined from 9.9 to 7.8. The Philadelphia fed survey dropped from 6.3 to 5.2. Economists were expecting the Philly Fed to rise to 9.0. The latest data is the third monthly decline for the Philly fed.

While not an official "economic" report the labor standoff along the West Coast ports continues. This is labor dispute by dock workers who want a raise. Oh by the way, they currently make about $250,000 a year. After nine months the situation intensified last week. The ports account for almost 12.5% of U.S. GDP. Should the dock workers strike it could cost the U.S. economy around $2 billion a day. There has already been significant delays loading and unloading several massive ships worth of cargo and it is starting to impact business.

One potential market mover was the FOMC minutes from the most recent meeting. Inside the minutes we see that the fed governors believe that U.S. economic growth is still showing improvement at a healthy rate. Another interesting tidbit was how the Fed believes that low oil prices and thus low gasoline prices will boost consumer spending, even though we really haven't seen any evidence that's happening yet. The overall tone of the minutes suggested the Federal Reserve is in no rush to raise rates, which should have been bullish for the stock market but stocks just shrugged it off.

Overseas Economic Data

Economic data overseas was mixed. The Bank of Japan decided to leave their interest rates and new QE program unchanged. The country did see its trade deficit drop to the lowest level in over two years with big exports to U.S. and Asia. Meanwhile their manufacturing PMI retreated from 52.2 to 51.5.

Across the Atlantic we saw the Eurozone ZEW economic sentiment survey rise from 45.2 to 52.7, which was better than expected. French manufacturing PMI declined from 49.2 to 47.7. Germany's manufacturing PMI was unchanged at 50.9. The Eurozone manufacturing PMI inched up from 51.0 to 51.1. PMI numbers above 50.0 suggest economic growth.

Major Indices:

The S&P 500 spent a few days consolidating near round-number resistance at 2,100. Then traders bought the dip on Friday morning and it rebounded to a new all-time high. The big cap index is up +0.6% for the week and now up +2.5% for the year. The next level of resistance could be the trend line of higher highs near 2,125.

chart of the S&P 500 index:

The NASDAQ has been showing significant relative strength. This index is up eight days in a row and trading at levels not seen since the year 2000. The 5,000 level is acting like a huge magnet. Odds are good the 5,000 mark could also be significant round-number resistance. I would not be surprised to see a spike toward 5,000 and then some profit taking. Year to date the NASDAQ composite is up +4.6%.

chart of the NASDAQ Composite index:

The small cap Russell 2000 index had a slightly better performance than the S&P 500 with a +0.7% gain for the week. It also closed Friday at new record highs. I'm still estimating potential resistance in the 1,240-1,260 area. Year to date the $RUT is up +2.25%.

chart of the Russell 2000 index

Economic Data & Event Calendar

This week we'll see a lot more data on the residential real estate market. The market will also digest the latest estimates on Eurozone GDP and U.S. GDP. The big event for the week is probably Federal Reserve President Janet Yellen's two-day appearance before the Senate and the House in the Fed's semiannual testimony to congress.

Economic and Event Calendar

- Monday, February 23 -
Existing home sales data

- Tuesday, February 24 -
Eurozone GDP estimate
Case-Shiller 20-city home price index
Fed Chairman Yellen's semiannual testimony before congress (day 1)
Consumer Confidence data
HSBC China manufacturing PMI

- Wednesday, February 25 -
New home sales data
Fed Chairman Yellen's testimony before congress (day 2)

- Thursday, February 26 -
Consumer Price Index (CPI)
Durable Goods Orders

- Friday, February 27 -
U.S. Q4 GDP estimate revision.
Chicago PMI
Pending home sales

Additional Events to be aware of:

Mar. 18th - Federal Reserve policy update
Mar. 18th - Fed Chairman Yellen press conference

Looking Ahead:

Last year we saw economic activity plunge thanks to the uncommonly cold winter. We could see a repeat of that this year. Large parts of the East Coast are already buried under significant amounts of snow. This weekend we're seeing another wide area of the country being hit with new snow storms.

Snow storms in winter? What a surprise, right? However, the weather has been bad enough that Goldman Sachs actually reduced their Q1 GDP estimate from +3.0% to +2.8%. That's still healthy but it acknowledges that the U.S. could see growth slow down in the first quarter.

Crude oil prices will remain a hot topic of debate on Wall Street. Last week saw oil prices decline as inventories rose sharply. There is growing speculation that the U.S. could actually run out of storage in the April-May time frame. When we have so much oil that we can't store it that's definitely going to push prices lower.

There have been a number of headlines regarding the drop in active rigs. That trend continued last week with another 48 rigs taken off line. The number of active oil and gas rigs is now down to 1,310, which is the lowest level since 2009. There is a delay between rig declines and production declines and U.S. production is still growing. We hit a record-breaking 9.28 million barrels a day last week. We probably have another three to six months before U.S. production actually declines and only then will oil have a chance at finding a bottom.

In other news Ukraine remains a geopolitical risk but equity markets just don't seem to care. The recent cease-fire did see fighting slow down but the violence continues. There are new reports that Russia is sending in even more troops, equipment, and support. Leaders from prior Soviet satellite states like Lithuania and Latvia are very concerned. They all see Russia as a major threat and are worried that if Europe doesn't stop Russia in Ukraine what who will stop Russia from invading their countries?

Looking back to the U.S. markets the bearish camp could argue that stocks are overbought. Stocks are supposed to rise and fall on their company's earnings. The U.S. market's major indices are at new highs and yet Wall Street's expectations for 2015 earnings have been plunging. The 2015 forecast for S&P 500 company earnings had dropped from $135 to $120.62. If this trend continues we could see earnings estimates turn negative for the year. Why are stocks rallying if earnings growth estimates are falling?

We are talking about earnings estimates so until Q1 earnings results are actually announced investors could be giving corporate America the benefit of the doubt, even though most corporate guidance during the Q4 earnings season was cautious. Bull markets do climb the wall of worry so it could just be one more brick in the wall.

Overall the resolution between Greece and the EU is short-term bullish, at least for the next two or three months. That could pave the way for the current rally to keep going. Believe it or not we only have about seven weeks before Q1 earnings season begins. The market's path of least resistance over that time frame appears to be higher.

~ James