Improving economic data was overshadowed by the ups and downs in the EU's negotiations with Greece. The U.S. market delivered a choppy week and ended on a sour note albeit relatively unchanged for the week. Banking stocks held up reasonably well with a +1.6% gain for the group. The normally strong biotechs turned lower with a -1.38% decline. The oversold bounce in the transportation stocks rolled over last week.

The U.S. dollar traded lower and that boosted crude oil prices to a +2.0% gain with oil closing near $60 a barrel. The rally in oil failed to do much for energy stocks, which lagged behind the commodity. Meanwhile uncertainty regarding Greece may have played a part in money looking for safety in American bonds. The U.S. bond market hit new 2015 lows on Wednesday but managed a rebound into positive territory for the week. The yield on the 10-year note retreated from 2.49% on Wednesday to 2.39% by Friday's closing bell.


I've been writing about the Greece story in this market commentary for five years and look forward to a day when it is no longer market news. This Greek tragedy might finally be nearing an end for Europe. Sadly the Greek people will likely suffer for several more years whether they exit the Eurozone or not.

Greek leaders have been meeting with their European counterparts and members of the Troika (EU, IMF, ECB) all week long. On Wednesday Bloomberg reported on a rumor that Germany might be willing to offer some sort of deal to Greece that would avoid a default. This sparked very widespread stock market rallies in Europe and the U.S. Unfortunately the very next day the negotiating team from the International Monetary Fund (IMF) said they were giving up.

IMF representatives actually left Brussels and headed back home to Washington D.C. because Greece wasn't cooperating. IMF spokesman Gerry Rice said, "We are well away from an agreement." It sounds like the IMF was pointing a few fingers at Europe as well for not being as accommodating as the IMF wanted. That same day (Thursday) Jens Weidmann, President of Bundesbank, a large German bank, said that the risk of a Greek default was rising every day. Standard & Poor's downgraded their credit rating on Greece from CCC+ to CCC as they expect the country to default within the next 12 months.

The IMF team was not the only group that had grown tired of Greece's stubbornness. Europe has been kicking the Greek-debt-default can down the road for five years. European leaders have been negotiating heavily the last four months after the new Syriza party rose to power in Greece early this year. On Thursday European Council President Donald Tusk condemned Greek Prime Minister Alexis Tsipras for stalling on a debt agreement deal. According to Bloomberg, Tusk told reporters, "There is no more time for gambling... The day is coming, I am afraid, that someone says the game is over." Tusk said they needed a deal before this week's Eurogroup meeting.

EU officials are also preparing for the worst. They met on Friday to discuss how to handle a Greek default and/or a Greek exit from the Eurozone. It was their first formal talks on a potential Greek default. You may recall two weeks ago the IMF chief said it is possible for Greece to leave the Eurozone.

Just in case you somehow forgot some of the key points in this story Greece recently postponed some of their payments to the IMF. Instead of making payments every week in June they have lumped them all together. The country needs to pay about 1.5 billion euros to the IMF on June 30th. On top of that Greece owes almost 7 billion euros in debt payments to the ECB through July and August this year. We already know that Greece is out of money and may not have enough to make their 1.5 billion payment to the IMF and meet their other bills (like salaries and pensions) for next month.

The EU has already provided up to 7.2 billion euros in additional bailout funds if Greece complies with new reforms. If Greece does not then the current bailout plan expires on June 30th. There is a Eurogroup meeting on June 18th and an EU summit on June 25-26th. Any deal that Europe agrees to needs to be ratified by some of its member nations and that takes a few days. Some are suggesting that this coming Friday, June 19th, is the real deadline for a deal in order to give Europe time to approve a deal before June 30th.

A few analysts have speculated that if Greece did default on its debts to the IMF or ECB it does not automatically eject them from the Eurozone. There is some sort of grace period (30 days, some say 60 days). During that time capital controls would be enacted to prevent people from pulling or transferring money out of Greek banks (which is kind of funny since people have been taking money out for several months). Bloomberg has posted an article on what could happen if there is no deal. You can read it here .

The Greek bond market is forecasting a default. Normally when a country's 10-year bond has a yield above 7% it's a major red flag of an impending default. Currently the yield on a Greek 10-year bond is 11.5%. Their two-year bonds have a yield above 20%.

Economic Data

Believe it or not but most of the U.S. economic data last week was relatively positive. The National Federation of Independent Business reported on Tuesday that U.S. small business confidence hit a five-month high in May with a reading at 98.3. The Job Openings and Labor Turnover (JOLTS) Survey said there were 5.37 million job openings in April. That is the highest reading since December 2000.

The Producer Price Index (PPI), a wholesale gauge for inflation, rose +0.5% in May. That was higher than expected and up sharply from April's -0.4% decline. It was the biggest one-month jump since April 2011 thanks to a surge in energy costs. Gasoline prices spiked +17% in May and that boosted the energy component up +5.9%. The core-PPI, which excludes more volatile food and energy prices, was only up +0.1% in May.

The University of Michigan Consumer Sentiment index improved from 90.7 in May to a preliminary 94.6 in June. The present conditions component and the expectations component both improved. The Commerce Department said that retail sales in May surged +1.2%. April was revised higher from +0.0% to +0.2%. Automobile sales were strong with a +2.0% jump.

Investors may want to swallow that retail sales number with a huge grain of salt. The Commerce Department normally applies a seasonal adjustment to the retail sales number. Over the last ten years the government's seasonal adjustment to the May retail sales number has ranged from 73.4% to 114.6%. This year the seasonal adjustment to May's retail sales was 275.5%.

That seasonal adjustment isn't stopping the better than expected retail sales figure from inspiring some GDP forecasts. Multiple analysts have raised their Q2 GDP predictions. The current average is +2.65% growth compared to the -0.7% contraction in the first quarter. The Atlanta Fed, which pretty much nailed their Q1 GDP estimate, is currently estimating +1.9% growth in the second quarter. That's a big improvement from their forecast of +0.7% two weeks ago.

Atlanta Fed's GDPNow forecast:

Overseas Economic Data

It was a relatively quiet week for economic data overseas and what we did get out of Europe was likely overlooked due to the focus on Greece. Eurozone reported their Q1 GDP rose +0.4% versus the prior quarter. This was in-line with estimates. France said their Industrial Production for April fell -0.9%. Italy's Industrial Production dropped -0.3%. Both of these were below estimates. The Eurozone saw its Industrial Production for April rise +0.1% when economists were expecting +0.3%.

Japan reported their Industrial Production for April was up +1.2% for the month. Their Core Machinery Orders surged +3.8% in April. Both of these reports were above estimates. China said their retail sales in May were up +10.1% from a year ago, which was in-line. China's Industrial Production for May was up +6.1%. Inflation is still falling in China with their PPI down -4.6% and their CPI down -0.2%. Both of these inflation gauges were lower than expected.

It's a bit funny to think that China, the world's second largest economy and soon to be the biggest, is still considered an emerging market. Last week saw investors yank money out of emerging-market equities with a total of $9.3 billion in outflows. That's the biggest one-week extraction since 2008. About $6.8 billion of that was removed from Chinese equities. The MSCI Emerging Markets Index fell 12 days in a row, through June 9th, the longest losing streak since 1990. You can read more about the story here .

The U.S. central bank is poised to raise rates but the rest of the world is still lowering rates to try and stimulate their economies. Last week saw the Reserve Bank of New Zealand and the Bank of Korea both cut their main lending rate by 25 basis points.

Many believe that the People's Bank of China is about to lower the reserve-requirement ratio for banks. China's economy is growing at the slowest pace in years. May saw exports fall for the third month in a row. One way to stimulate growth is lower reserve ratios for banks to they'll lend more. The China Merchants Bank Co., HSBC holdings, and Goldman Sachs all expect the country's central bank to reduce this rate soon.

Major Indices:

It was a bumpy week for stocks. The S&P 500 dipped into the 2,070-2,075 range and then bounced up to 2,115 at Thursday's peak. This looks like a failure at the three-week trend of lower highs. The pattern suggest we could see the S&P 500 retest support in the 2,070 region. If that fails then 2,040 is potential support.

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

chart of the S&P 500 index:

Here's a crazy statistic for you. The S&P 500 is only 41 points or 1.9% away from a new all-time record high. Yet 100 stocks, one fifth of the index, are in a bear market with declines of more than -20% from their peaks. A year ago only 4% of the S&P 500 was in a bear market.

20% of the S&P 500 are in a bear market

The NASDAQ composite is holding up relatively well. It is down three weeks in a row but that's just timing of the calendar. The index is only about 65 points away from a new 15-year high. It has essentially been churning sideways the last three weeks in a row. This index bounced near its trend of higher lows on Tuesday.

The 5,100-5,110 area is overhead resistance. If last week's low near 4,975 fails the nearest support is probably 4,900. Beyond that then 4,800 and its 200-dma.

chart of the NASDAQ Composite index:

The small cap Russell 2000 actually looks like one of the healthier indices. This index is up five out of the last six weeks and closed above resistance near 1,260 on Friday. It's only about 15 points away from a new all-time high. A failure near 1,280 would look like a potential bearish double top but in the mean time the path of least resistance seems to be higher.

chart of the Russell 2000 index

Economic Data & Event Calendar

Economic data for the week ahead is going to skew towards real estate. However, these reports will likely be overlooked. Investors will be focused on the FOMC meeting, Yellen's press conference, and if Greece can reach a deal by Friday's Eurogroup meeting.

No one expects the FOMC to change interest rates so the market will be interested in the committee's statement and their comments on the economy. Yellen's press conference is also a potential wildcard since she could also misspeak and spark a move one way or the other. Normally Fed meetings can be major, market-moving events. Yet even this one will likely be dwarfed by the Greece situation.

Q2 earnings season is only about three weeks away. Alcoa (AA) kicks it off on July 8th.

- Monday, June 15 -
Industrial Production
NAHB Housing Market Index (builder sentiment)
New York Empire State manufacturing survey

- Tuesday, June 16 -
Housing Starts & Building Permits

- Wednesday, June 17 -
FOMC interest rate decision
Fed Chairman Yellen's press conference

Eurozone CPI

- Thursday, June 18 -
Consumer Price Index (CPI)
Philadelphia Fed survey

- Friday, June 19 -
Bank of Japan interest rate decision
Eurogroup meeting about Greece

Additional Events to be aware of:

June 24th: final Q1 GDP estimate
June 25-26th: EU summit
July 3rd: U.S. market closed for Independence Day

Looking Ahead:

The Wall Street Journal ran a small article last week on how the market hasn't gone anywhere this year. I don't normally focus on the Dow Jones Industrial Average ($INDU) since it only has 30 stocks in it. However, a lot of the financial media still follows it closely. According to the WSJ article the $INDU has crossed the unchanged mark 16 times in 2015. There has never been that many crosses back and forth across unchanged for the year in the entire 119-year history. The $INDU isn't the only index that isn't moving much. The S&P 500 is up less than 1.75% for the year. The lack of movement, one way or the other, is a good reason why so many investors are currently neutral on the market.

Chart of the Dow Jones Industrial Average

The latest AAII Investor Sentiment survey saw some interesting changes. Bullish sentiment plunged -7.3% to just 20.0%. Where did those bullish investors go? It looks like they all turned bearish with bearish sentiment up +8% to 32.6%. Charles Rotblut, the Vice President of AAII, defines unusually low levels of bullish optimism as anything below 28.6%. He commented on the survey's most recent poll numbers and on Thursday said, "Bullish sentiment readings below 28.6 percent are unusually low, and unusually low levels of optimism have typically been followed by better-than-average six- and 12-month returns for the S&P 500."

Current AAII Investor Sentiment

According to the American Association of Individual Investors we haven't seen bullish sentiment this low since April 2013. The high levels of neutral sentiment are also extraordinary. Any neutral reading above 45% is considered unusual and the poll just marked its 10th week in a row with neutral sentiment above this key level. They surveyors also note that elevated levels of neutral sentiment tend to be followed by bullish stock market performances six and 12-months down the road.

Russell Rebalancing

The annual Russell rebalancing or reconstitution is almost here. Trillions of dollars track the Russell indices. Their decisions on what stocks to add or subtract is definitely a market event. The Russell 3000, which includes the big cap Russell 1000 and the small cap Russell 2000, represents 98% of the investable U.S. equity market. They just announced their final additions and deletions for this year and the changes will take place on Friday, June 26th, after the closing bell.

The NASDAQ market issued a description of the Russell rebalancing and discussed how it impacts the market a few years ago. Here's an excerpt from their post in June 2010:

The annual Russell Reconstitution is usually one of the most highly-anticipated and heaviest trading days in the US equity markets. Each year, the Russell Investment Group rebalances its indexes during its annual reconstitution — commonly known as the Russell Reconstitution or the Russell Rebalance. On Friday, June 25, 2010, Russell will reconstitute its 25 US indexes in order to accurately weight the 4,000 largest companies in the US stock markets by market capitalization (of float) and in so doing provide a truer reflection of stock market activity and performance. Russell also has global indexes which will be reconstituted at the same time.

The reconstitution is usually one of the most highly-anticipated and heaviest trading days in the US equity markets, as index and other asset managers seek to reconfigure their portfolios to reflect the composition of Russell's indexes. Buying and selling activity by money managers will be influenced by companies being added and deleted from the Russell 3000 and Microcap Indexes as well as the changes in the weightings among component companies. Companies which are switched between the Russell 1000 and Russell 2000 indexes in the annual re-ranking may also experience elevated trading activity as there are different levels of assets managed to these indexes.

Russell calculates total market capitalization of US common stocks and ranks them from largest to smallest to determine whether they are large enough for inclusion in one or more of the Russell indexes. The largest 4,000 companies, which satisfy all of Russell's eligibility requirements, become members of the Russell indexes. After membership is determined, the shares of the securities are adjusted to include only those shares available to the public or otherwise referred to as "float." Stocks are subsequently weighted in the Russell US indexes by their available float-adjusted market capitalization.

Composition of the Russell 3000 and Microcap Indexes are as follows: The Russell 3000 Index consists of the Russell 1000 and 2000 Indexes. The Russell 1000 is comprised of the first 1000 companies in the Russell 3000 and represents the largest US companies. The Russell 2000 is comprised of companies numbered 1001 through 3000 within the Russell 3000 and is generally viewed as the benchmark index for small-cap companies. The Russell Microcap Index includes the smallest 1,000 securities in the Russell 2000 plus the next 1,000 securities.
source .

Link to this year's additions and deletions: here .

This rebalancing tends to have a negative effect on the market as investors and funds sell the stocks being removed.

The week ahead will be dominated by the Fed meeting, Yellen's press conference, and the Greek crisis. However, it's worth noting that Friday will be an quadruple-witching expiration. Stock options, stock index options, single-stock futures, and index futures will all expire at the same time on June 19th. These quadruple witchings occur four times a year. Volume tends to surge as investors and traders adjust or close positions ahead of expiration.

It would be nice to think that after this week the U.S. market might see some end of quarter window dressing. However, according to Jeff Hirsch with the Stock Trader's Almanac, the week after quadruple witching is normally down. The Dow Industrials have been down 22 of the last 25 years with an average loss of -1.1%. The S&P 500 and the NASDAQ also tend to be down although not as bad as the Industrials.

If you consider all the potentially negative events in the next two weeks it might be a good time to enjoy your summer vacation and not trade for a while. Stocks are likely stuck churning sideways until one of these events knocks them lower or the unthinkable happens and Greece actually agrees to some sort of deal.

It could be a good time to get out there and grill up some expensive hamburgers. Beef prices have been surging with a +30% rise in the past two years. The price of beef just hit an all-time high in May.

~ James