A mixture of bad news coalesced on Friday into a widespread stock market sell-off. Money managers were feeling out of the information loop when the global Bloomberg terminal network went down between Thursday and Friday's sessions. Worries over a Greek exit from the Eurozone seem to be growing and that sparked a sharp drop in European markets. Meanwhile afterhours markets in China produced a knee-jerk reaction lower to new regulations on margin and short selling. Disappointing corporate earnings, as big cap companies blamed the strong dollar, did not improve investor sentiment.

The U.S. stock market's drop on Friday erased its gains for the week. The selling was preceded by a -1.1% decline in the Japanese NIKKEI. The German DAX index fell -2.58% on Friday while the Euro STOXX 50 plunged -3.4%. As investors looked for safety the rally in government bonds continued. The yield on the U.S. ten-year note has fallen from 1.95% a week ago to 1.86%. The German ten-year note saw its yield drop from 0.16% a week ago to an all-time record low of 0.07% on Friday.

One exception to the market's weakness was oil. Crude oil has seen its rally accelerate with a +11.5% gain last week. This is the fourth weekly gain in a row. The weekly Baker Hughes rig count continues to drop. Last week saw another 34 rigs shut down. That's the 19th week in a row active rigs have dropped in the U.S. We're down to 954 combined oil and gas rigs from the October 2014 high of 1,609 rigs. Baker Hughes said historically a downturn like this ends when the number of active rigs drops -40% to -60% and currently we're down -55%, which would suggest we're getting close to a bottom. However, a Morgan Stanley analysts noted that a pullback in active rigs normally takes about 25 weeks to play out and that would suggest we still have six weeks to go. Morgan Stanley is estimating it could take another three months.

Economic Data

The economic data was mostly negative last week. The New York Empire State regional fed manufacturing survey dropped to -1.2 when economists were expecting a reading of 7. The Philadelphia Fed Business Outlook survey went the opposite direction and improved from 5.0 in March to 7.5 in April. The U.S. industrial production numbers fell -0.6% in March from a +0.1% gain in February.

Housing data was bleak. Housing starts in March only rose +2% to 926,000 when analysts were expecting a +15.9% rise. This followed a -15% drop in February. Building permits declined -5.7%. We'll get more on residential real estate sales this week.

U.S. retail sales data rose +0.9%. This was below expectations for +1.1%. Consumer sentiment in April improved from 93.0 to 95.9, which was better than estimated.

The Consumer Price Index (CPI) delivered its second monthly gain in a row with a +0.2% reading. The core CPI, which excludes food and energy, was up +0.2% and the third monthly gain in a row. Year over year the CPI is up +1.8% and nearing the Fed's +2.0% target. The main reason behind the CPI's rise was a rebound in gasoline prices. The energy component surged +3.9% in March.

This has some market pundits speculating on the possibilities of a Fed rate hike in June. However, the current consensus on Wall Street is the Fed's next hike will not happen until September or October this year.

Overseas Economic Data

Japan reported that their Industrial Production data from February fell -3.1% for the month following a -3.4% drop in January. Their capacity utilization dropped -3.2%. Meanwhile in China there seems to be a big divergence between their economy and their stock market. Economists were expecting Chinese exports to rise +12% but the latest report showed a -15% drop. The government reported last week that their Q1 GDP was +7.0%. That met expectations but was down from Q4's +7.3%. At 7.0% their economy is at a multi-year low.

There is widespread doubt over the accuracy of some Chinese economic reports, which is why many believe the Chinese economy is actually worse than what the government is publishing. Analysts have turned to following power consumption in China as an ancillary gauge on the country's growth. The most recent data showed power consumption in China fell -2.2% from a year ago and marks the second decline in a row.

In spite of this economic slowdown the stock markets in China are surging. Both the Shanghai composite and the Hong Kong Hang Seng index recently hit multi-year highs. The Shanghai composite is up almost +100% in the last 12 months. The Hang Seng just tested the 28,000 level for the first time since 2007. Both markets could see a sell-off on Monday.

After the closing bell in China on Friday their stock market regulators announced new rules limiting investors ability to use margin. At the same time they also increased the number of stocks that could be shorted. Margin use in China has exploded so it's not a surprise that regulators would try and cool the current market mania. Long-term the fact that they're allowing more stocks to be shorted is a good thing. Yet short-term (like Monday morning) there could be a knee-jerk reaction lower. Futures for the Chinese market turned lower after this announcement.

Looking across the Atlantic ocean the economic data was mixed and generally overshadowed by the situation with Greece. The Eurozone's Industrial Production for February improved +1.1%. That was better than expected. Their consumer price index (CPI) saw inflation rise +1.1% in March. This is welcome news since the region has been struggling with deflation. Right now the real focus is Greece.


The epic game of brinkmanship between Greece and Europe (mostly Germany) is quickly coming to a head. Two weeks ago Greece made a $490 million debt payment to the IMF on April 9th. Now they need to come up with another payment of $763 million to pay the IMF in early May. A few days ago the Financial Times ran a story about Greece asking the International Monetary Fund if they could delay their upcoming payment. The IMF said no. Greek officials deny any such request was made. The story still generated a new round of worry about Greece's ability to honor its debts.

The story above reinforced concerns that Greece is essentially out of cash. There was another news story out late last week that said Greece will have to scrape together all its remaining money to pay its government wages and pensions at the end of April, which would amount to about $2.1 billion. The official Greek news agencies deny the situation is that dire (what else would they say?).

If that wasn't bad enough Standard & Poor's downgraded the country again. This time Greece has been cut from "B-" to "CCC+" with a negative outlook. This action helped drive Greek bonds to their worst week in months. The yield on a 10-year Greek bond is now 12.9% and the 2-year bond has a yield of 26.8%. If you recall, normally sovereign 10-year yields above 7% is the red-line warning to investors of an potential default.

Euro-area finance ministers are going to have another meeting to argue over Greece this coming April 24th in Latvia. No one expects any serious deal to get done by then. There is speculation brewing that Europe is going to relax some of the reforms they requested from Greece to qualify for another round of bailout money.

Officially the EU does not want Greece to leave. Joining the Eurozone was supposed to be a one-way ticket with no going back. If Greece leaves then it opens up the possibility of over countries leaving the euro. Unfortunately, Greece will never be able to pay back the hundreds of billions of euros worth of debt they have accumulated (currently about 303 billion euros). In spite of the official stance one has to wonder, now that the European Central Bank (ECB) has started its QE program to stimulate their economy, and after years of preparing for a potential exit, is Europe finally ready for Greece to leave? Are they prepared for the short-term shock and ready to look beyond a Grexit?

Bloomberg recently ran an article on some of the potential scenarios facing Europe and Greece. Here's an excerpt on what the author's believe is the worst case scenario:

"Greece separates from the euro area in a messy default, amid demonstrations, deepening misery for most and the government blaming everything on the Germans.

No help is provided to support a new currency and to keep servicing bonds and IMF debt. That triggers cross-default clauses to all creditors. The government and banks collapse, meaning that years will be needed before a new structure emerges.

Greece's economy plunges into a second depression. The blow from the biggest default in the history of capitalism drives Europe back into a recession and heaps pressure on vulnerable euro countries such as Italy.

Bad blood leads to Greece's departure from the European Union. The idea that the euro is irreversible is thrown into question, rattling global markets. The economic implosion paves the way for extremists, from either the left or the far right, to take power. Those who can, flee the country.

The tumult casts doubt on Greek membership in NATO. A new - - and unstable -- government turns to Russia for support, providing a Mediterranean outpost for Vladimir Putin." (Link to the Bloomberg article.)

It has been often speculated that if Greece were to leave the Eurozone it would occur over a weekend. This is just another reason why stocks were weak on Friday. The next few Friday's could be challenging for investors. Influential investor Dennis Gartman believes that Greece could make the decision to leave within the next two or three week(ends).

Greece's $763 million payment to the IMF is due on May 12th. According to the New York Times, Greece has an even larger burden of €11 billion in payment to the ECB in June and July this year. CNN Money is quoting a different figure of €3.5 billion in July and another €3.2 billion in August. It doesn't matter if the total is 6.7 billion or 11 billion euros the odds of Greece making these payments to the ECB without help or some sort of restructuring seem very small.

Major Indices:

Momentum indicators for the big cap S&P 500 index are rolling over. Friday's big drop took a lot of wind out of its sails. For the week the S&P 500 lost -0.99% and is now only up +1.0% for the year.

I cautioned readers last week that the March highs near 2,115 could be resistance. Well the S&P 500 failed twice near 2,112 this past week. Should this pullback continue I'd watch for potential support near 2,050 or the simple 200-dma nearing 2,025.

chart of the S&P 500 index:

The NASDAQ spent most of the week hovering on either side of the 5,000 level. Friday's drop of -1.5% sent the index back toward its rising 50-dma. It also reduced its 2015 gains to +4.1%. What should worry traders is the technical pattern the NASDAQ is forming. The pullback on Friday looks like the right shoulder to a bearish head-and-shoulders pattern. The neckline (support) is in the 4,850 area. If this is an H&S pattern then a breakdown under 4,850 would forecast a drop toward 4,650.

chart of the NASDAQ Composite index:

The small cap Russell 2000 index was hitting new all-time highs prior to the market's selloff on Friday. The index found support at its trend line of higher lows. Should this trend line break then 1,220 and 1,200 are potential support areas. Last week's -1.0% drop reduced the $RUT's 2015 gains to +3.9%.

chart of the Russell 2000 index

Economic Data & Event Calendar

The week ahead is relatively quiet for economic data. We'll see new and existing home sales. Friday will bring the latest durable goods orders. Yet all of these will be overshadowed by the deluge of corporate earnings. Almost 25% of the S&P 500 companies will report this week. Some of the high-profile companies reporting include: AMZN, BA, EBAY, GOOG, KO, IBM, MCD, MSFT, SBUX, YHOO and YUM.

Economic and Event Calendar

- Monday, April 20 -
Chicago Fed national activity index

- Tuesday, April 21 -
(nothing significant)

- Wednesday, April 22 -
HSBC China manufacturing PMI
Existing Home Sales

- Thursday, April 23 -
Eurozone PMI data
New Home Sales

- Friday, April 24 -
Durable Goods Orders

Additional Events to be aware of:

April 29th - FOMC policy update
May 7th - Election in the United Kingdom

Looking Ahead:

The Atlanta Fed has updated their Q1 GDP outlook again. They currently expect U.S. Q1 GDP growth to be +0.2%. The economists at the IMF must think this weakness is temporary. Currently the IMF is still expecting +3.0% growth for the U.S. in 2015, which would be the best year since 2005.

Meanwhile market analysts are starting to speculation on a potential correction in stocks. Mark Tepper, CEO of Strategic Wealth Partners, offered an interesting outlook. According to Tepper, "Current market and economic conditions have created the perfect storm for a 10% market correction. We are looking at really stretched valuations right now with the forward PE of 17+ a red flag." Also, "We have deteriorating earnings, fading economic momentum, the strong dollar and looming interest rate hikes. I do think a pullback is very much in the cards."

Tepper might be right. The U.S. market is way overdue for a correction (defined by a -10% pullback from the market's highs). At the moment the current bull market in U.S. stocks is six years old. Furthermore we have gone about 1,300 days without a -10% correction. We got really, really close last year with a -9.8% pullback in October 2014.

Upward momentum has definitely stalled. The S&P 500 is up less than +0.7% in the last 75 trading days. We've gone 80 days without a 2% (one-day) move. According to Jeff Hirsh, with the Stock Trader's Almanac, the long-term average for the market is a -10% correction every 514 days. Mr. Hirsh did point out that the market can keep going. The longest the S&P 500 has ever gone without a correction was 2,553 days in the 1990s.

Overall I don't see a lot of changes from my comments last week. I warned readers that this would likely be a very volatile earnings season. Everyone already knew the strong dollar would hurt big cap earnings. The fact that corporations are warning the dollar could hurt results for the rest of the year shouldn't be that surprising. The real wildcard here could be Greece.

Greece has been a thorn in the market's side for years but that hasn't stopped the U.S. market from a six-year run (Thanks QE!). The European markets were hitting all-time highs earlier this month. The big banks and the financial system has had plenty of time to prepare for a Greek default. Odds are really good that the market will see a sharp knee-jerk reaction lower if (or should we say when) Greece defaults and/or announces it is leaving the Eurozone. The bigger risk is how the global market chooses to interpret what happens next? A Greek exit could pave the way for countries like Spain and Italy to leave the Eurozone and that would generate significant volatility in the markets.

~ James