The American stock market managed to ignore the Greek situation nearly all week long. The rhetoric in Europe was heating up between Greek leaders and their European creditors. German leaders called their Greek rivals "clowns" while Greek leaders said the IMF was criminally responsible for the situation in Greece. The Greek central bank pleaded for everyone to play nice and avoid an exit from the Eurozone, which could cause an "uncontrollable crisis." Finally an emergency meeting for Euro leaders has been called for Monday, June 22nd. If a deal isn't reached we could see equity markets behave poorly. Concerns over what could happen next week sparked some profit taking on Friday.

Overall the U.S. market delivered one of its best weekly performances in nearly two months. The tone of the FOMC meeting and Fed Chairman Yellen's press conference was interpreted as dovish. This fueled widespread gains on Wednesday and Thursday. The NASDAQ composite and small cap Russell 2000 indices broke out past resistance to hit new all-time highs on Thursday.

The major market indices all posted gains for the week. Some of the stand out industries were the semiconductors (+1.29%) and the biotechs (+3.5%). The transportation average closed with a very minor loss (almost unchanged) while weakness in crude oil weighed on the energy stocks, which closed in the red for the week. Dollar weakness helped fuel a bounce in gold, which closed at $1,200 an ounce. Meanwhile money was flowing into U.S. bonds, which pushed the yield on the 10-year note down to 2.27%.

Economic Data

There were a number of headlines for U.S. economic data. Housing starts fell -11.1% in May. This followed a huge surge of +22% in April. Economists were expecting a -4% pullback. Building permits rose nearly +12% in May to an annual pace of 1.275 million, which is the highest reading since 2007. The National Association of Homebuilders housing market (confidence) index came in better than expected with a rise from 54 to 59, which is a nine-month high.

Industrial production slipped -0.2% in May after April was revised lower from -0.3% to -0.5%. The consumer price index (CPI) was hotter than expected with a +0.4% rise in May, up from +0.1% in April. It was the biggest one-month jump since February 2013. A +10% jump in gasoline prices fueled the move. The core-CPI, which excludes food and energy, only rose +0.1%.

The New York Empire State manufacturing survey fell from 3.1 to -2.0 in June. Analysts were expecting a rise to 6.0. Countering weakness in New York was the Philadelphia Fed Survey that rose from 6.7 to 15.2 in June. Economists were only expecting a rise to 9.

FOMC Meeting

The big event for the week was the FOMC meeting and Federal Reserve Chairman Janet Yellen's press conference after the FOMC announcement. According to the Fed's statement, "Committee continues to judge that the first increase in the federal funds rate will be appropriate when it has seen further improvement in the labor market and is reasonably confident that inflation will move back to its 2 percent objective over the medium term." The Federal Reserve also downgraded their 2015 GDP growth estimates from +2.3-2.7% down to +1.8-2.0%.

Janet Yellen said the market was too focused on when the Fed would start raising rates. In her opinion the market should look at the pace of rates, which she suggested would be very slow and moderate. The combination of the FOMC statement and Yellen's comments seemed to convince investors that the Fed would keep rates low for a long time and not be in a rush to raise rates.

Previously, most of the economists and analysts polled were expecting the Fed to raise rates in September 2015. Now we're seeing some analysts push that forecast farther out. Goldman Sachs does not expect a rate hike until December this year. Bespoke Investment Group is forecasting the first rate increase will be February 2016.

Overseas Economic Data

It was a relatively quiet week for economic data out of Asia. The Bank of Japan left their monetary policy unchanged with rates at 0.1%. The Japanese NIKKEI index managed to close above psychological resistance at the 20,000 mark. Nearly all of the headlines from China were centered on its stock market's volatile moves. The Chinese Shanghai Composite plunged -13% for the week for its biggest one-week drop since 2008. There were numerous stories about how the Chinese stock market bubble may have finally popped.

Looking across the Atlantic we see a few more economic reports and events. The Swiss National Bank left their rates unchanged at -0.75% (yes, that's a negative rate). The E.U. agreed to extend their sanctions against Russia for another six months. These were due to expire at the end of July. The new extension should be ratified by leaders this week.

The Eurozone ZEW economic fell from 61.2 to a much worse than expected 53.7. The Eurozone CPI (consumer inflation) for May rose +0.2% for the month and +0.3% year over year. Yet Germany's PPI (wholesale inflation) was flat for the month and down -1.3% year over year, which was lower than expected. Nearly all of these headlines were dwarfed by the daily gyrations in the Greece negotiations. Money was flowing into the German bond market looking for safety. This drove the yield on the 10-year German bund down to 0.75%.


This is my obligatory update on the situation with Greece. Feel free to just jump ahead if you're as sick of this story as I am. I can probably sum it up in one sentence. Greek leaders continue to play their epic game of brinkmanship with Europe and expect the Eurozone to blink first before the June 30th deadline on Greece's IMF debt payment.

Tensions are definitely rising. Greek Prime Minister Alexis Tsipras called out the International Monetary Fund (IMF) for being criminally responsible for the crushed Greek economy. He might as well accuse the IMF of predatory lending. On Thursday Reurters reported that European Central Bank member Benoit Coeure suggested that the ECB's emergency lending will keep Greek banks open for Friday but there are no guarantees about Greek banks opening on Monday. This didn't help the Greek banks. Citizens had been pulling money out of Greek banks all week long but it accelerated on Friday with a record 1.2 billion euros withdrawn in one day. Estimates suggest depositors withdrew 4.2 billion euros from Greek banks for the week.

Just in case you forgot Greece owes the IMF a debt payment of about 1.5 billion euros on June 30th. They owe another 7 billion euros to the ECB across the July-August timeframe. Everyone knows Greece is bankrupt and can't pay these bills. Previously agreed to bailouts for Greece have about 7 billion euros set aside as aid but Greece hasn't meet the necessary reforms required to qualify for this next tranche of aid and the bailout agreement expires on June 30th.

There is an emergency Eurogroup meeting and an emergency European Council meeting scheduled on Monday (June 22nd) to discuss the Greek situation. Right now expectations are low for any sort of agreement to be reached. The leftwing Syriza party was elected to power in Greece on a platform of no new austerity. It seems unlikely they are going to bow to EU demands. Bloomberg news said that Greek PM Tsipras told reporters, without a deal that undoes some of the punishing austerity, "we will assume the responsibility to say 'the great no' to a continuation of the catastrophic policies."

There are less than ten days left in the month of June. Time is running out quickly for Greece. Odds of them defaulting are rising sharply. The yield on Greek 2-year bonds surged to 30%.

Greece wants the Troika (IMF, ECB, EU) to actually reduce their massive debt load. The Eurozone doesn't want to do that because if they erase any debt for Greece then Spain and Portugal (and probably Ireland) will immediately demand debt reductions as well.

Business insider has an article on what would happen if Greece defaults on the IMF. story here .

Major Indices:

The big cap S&P 500 managed a decent three-day rally midweek. It finally broke through its four-week trend of lower highs. Then it immediately reversed on Friday. The S&P 500 managed a +0.7% gain for the week, which boosted its 2015 gain to +2.5%.

The 2,100 area could be short-term support. Below that it would be the 2,070 area. The prior highs near 2,135 is overhead resistance.

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

chart of the S&P 500 index:

It was a bullish week for the NASDAQ composite. Widespread gains in the semiconductors and the biotech stocks helped the NASDAQ breakout past resistance and hit all-time highs. The prior high was 5,132 from March 2000. The index hit 5,140 on Thursday and closed at 5,132.95.

This is blue-sky territory if the rally continues. We can guess at the next resistance level, which is probably 5,200 or the trend line of higher highs (see the daily chart below). Last week's +1.3% gain in the NASDAQ pushed its year to date gain up to +8.0%.

chart of the NASDAQ Composite index:

Small caps were also showing relative strength with the Russell 2000 breaking out past resistance near 1,280 and closing at new all-time highs. The $RUT is up three weeks in a row and up six out of the last seven weeks. Last week's +1.5% gain puts the $RUT's 2015 rally at +6.6%.

Odds are good the 1,300 mark could be round-number resistance. If we're lucky the 1,270 area is short-term support. Otherwise we can look toward the trend of higher lows as potential support.

chart of the Russell 2000 index

Economic Data & Event Calendar

The week ahead is relatively quiet for U.S. economic data. We'll get a little bit more on housing data. The third estimate on Q1 GDP will be released. All of this will be overshadowed by Greece headlines.

There are two emergency meetings for EU leaders on Monday. Later in the week there is a two-day EU summit.

Q2 earnings season is fast approaching. Alcoa (AA) kicks it off on July 8th.

- Monday, June 22 -
Existing Home Sales
(Emergency) Euro Summit on Greece
(Emergency) EU Finance minister meeting on Greece
HSBC China manufacturing PMI data

- Tuesday, June 23 -
Durable Goods Orders
New Home Sales
Eurozone PMI

- Wednesday, June 24 -
Final Q1 GDP estimate
Eurozone GDP estimate

- Thursday, June 25 -
EU summit (day 1)
Personal Income & Spending

- Friday, June 26 -
EU summit (day 2)
University of Michigan consumer sentiment (final for June)

Additional Events to be aware of:

June 30th: IMF deadline for Greek debt payment
July 3rd: U.S. market closed for Independence Day

Looking Ahead:

Assuming the Greece situation doesn't blow up on Monday the U.S. market could get a boost from merger and acquisition headlines from the healthcare sector. Over the weekend Anthem (ANTM) announced a $47 billion bid to buy rival Cigna (CI). Meanwhile the Wall Street Journal reported that Aetna (AET) is making a bid for rival Humana (HUM). On Sunday CI rejected ANTM's bid saying it's too low.

It will be a busy week for the IPO market. There are 17 IPOs scheduled to launch in the next five trading days. Most of these are pretty small but these will soak up some of the available cash investors have ready to buy stocks. It's just one more thing that could stall the rally in the market.

The most hated bull market in history continues to see low investor participation and short-term traders betting against it. Active money managers have reduced their equity exposure to the U.S. market to the lowest level since October 2014. There has also been a surge of call option buying on the CBOE volatility index (VIX). This is a bet that the VIX will rise, which normally occurs on big market declines. It's possible this is a directional trade on a Greek default roiling the equity markets.

On a more positive tone a team at Bank of America Merrill Lynch believes that investors could be rotating out of bonds and into stocks. They noted that bond funds saw about $10 billion in outflows last week. It was the largest one-week draw in nearly two years. At the same time stock funds saw inflows of almost $11 billion, which is the largest move in three months.

The week after quadruple witching option expiration (which was Friday, June 19th) does not have a great track record for stock market gains. This week the major indices could be influenced by money managers adjusting positions for the annual Russell rebalancing, which takes place on Friday, June 26th this year.

Technically the breakout to new highs in the NASDAQ and the Russell 2000 looks very bullish. Yet I would hesitate to launch a bunch of bullish bets this week due to the overwhelming risk that Greece could default by July 1st. The next several days could see an increase in market volatility. Stocks will likely ricochet between positive and negative headlines generated by the maelstrom of panicked European negotiations with Greece.

~ James

"You're gonna need a bigger boat." - Chief Martin Brody
(June 20 was the 40th anniversary of Jaws)