The second quarter of 2015 is quickly coming to a close. All eyes were on the Greek drama as the final days rushed by with both sides refusing to budge from their positions. This weekend there was a flurry of headlines as Europe tried to sweeten the pot to get Greece to make a deal. Yet Greek leaders refused and Prime Minister Tsipras threw a Hail Mary pass and announced a referendum to let the public vote on it. The week ahead could be tumultuous as markets face a move into uncharted territory.

Just in case you are not familiar with American football, a Hail Mary pass is a very long forward pass, usually made in desperation, with only a very small chance of success. It's usually thrown in the final seconds of the game.
Looking at the last five days the U.S. stock market rallied on Monday (June 22nd) on hopes of a Greek deal. Then stocks slowly faded lower throughout the rest of the week as the impasse between Greece and its European creditors continued. The major U.S. indices all posted losses for the week. The normally strong biotechs were not immune and suffered some profit taking with the biotech index down -0.2%. Transports underperformed with a -2.0% drop to new 2015 lows. The semiconductor stocks were big losers thanks to a sharp drop in Micron (MU), which pushed the SOX index to a -3.4% weekly decline.

Money was coming out of the bond market and yields on the U.S. 10-year note surged to 2.48%. This yield is testing its highs for the year and looks poised to break past the 2.5% level. Crude oil churned sideways to close at $59.65 a barrel. Gold snapped a two-week bounce with a drop to $1,173.70 an ounce. Meanwhile yields on the German 10-year bond settled at 0.925%.

The U.S. Supreme Court decision on Thursday to uphold the federal subsidies for the Affordable Care Act (a.k.a. Obamacare) was bullish for many of the healthcare stocks. Hospitals saw the stocks soar on the news. Meanwhile the last hour of trading on Friday was busy thanks to the annual Russell rebalancing. Thursday's market volume was about 5.8 billion shares. The rebalancing on Friday boosted trading volume to more than 8.6 billion shares.


It was a super busy week for Eurozone finance ministers, EU leaders, the IMF, the ECB, and Greek representatives. Multiple meetings failed to produce any headway. Greece tried to get the International Monetary Fund (IMF) to restructure their debt on Wednesday but the IMF refused. On Thursday European leaders tried to sweeten the deal and boosted their bailout offer to provide 15.5 billion euros in funds, up from 7.2 billion. This would be enough to fund Greece's debt needs through the end of November. Greek Prime Minister Alexis Tsipras balked at his opponents demands and decried the offer as "blackmail".

This Greek drama that began five years ago could be nearing its final chapter. Although even as I type those words they ring hollow. We would like to think this debt crisis with Greece is nearing an end but it will probably last months and years to come. The only real change is whether or not Greece officially defaults on its debt July 1st. An actual exit from the Eurozone is not immediately guaranteed.

Just in case you've been living under a rock the last few weeks here's a quick reminder. Greece's current bailout program is due to expire on June 30th. This bailout program was frozen when the leftwing, anti-establishment party Syriza rose to power in Greece earlier this year. Greece was supposed to receive another 7.2 billion euros in bailout funds but this was halted as Europe demanded more stringent reforms before handing over more cash to Greece.

June 30th is also an important date because Greece owes about $1.7 billion to the IMF. The country was supposed to pay this amount spread out across the month of June but they delayed it into a lump sum payment at the end of the month. The problem is Greece is broke and they can't afford to make this payment and pay their other bills like pensions and salaries. Plus the country owes another $7 billion to the ECB and IMF in July and August this year.

Referendum Announcement

Eurozone leaders were hoping to get the new Greek government to cave in and sign a deal before June 30th. Unfortunately the Syriza party rose to power on a no new austerity platform. On Saturday (June 27) Greek PM Tsipras shocked everyone with a TV appearance to his people claiming that his government should not make this decision. Tsipras claims that the future of Greece should be decided by the people so he announced a referendum to vote on this new deal with the country's creditors to be held on July 5th.

Let's see... the deadline is June 30th and Tsipras announces a vote for July 5th. Tsipras is making a calculated bet that Greece's creditors will still be willing to do a deal in July. He's also betting on recent polls that show the majority of Greeks want to stay in the Eurozone. By putting this decision to a vote he can reduce the criticism from the very vocal minority and let the silent majority take responsibility for this decision. Publically his government has rejected the new offer and he is urging his citizens to reject it as well. This way he can claim that he remained true to his word and campaign promises while letting the consequences of this decision fall on the Greek people.

Reaction and Capital Controls

In reaction to the referendum announcement the ECB has frozen its ELA to Greek banks. On Sunday European Central Bank President Mario Draghi called an extraordinary meeting with the ECB's Governing Council. They decided to cut off Greek banks from the Emergency Liquidity Assistance program that has kept the Greek banking system afloat the last several weeks.

Greek citizens have been worried about what happens after June 30th if there isn't a deal and they've been pulling money out of Greek banks for months. This accelerated in the last couple of weeks with billions of euros being withdrawn. On Saturday Skai television reported that another one billion euros was withdrawn in a single day. Greek banking leaders noted that hundreds of the country's 7,000 ATMs had already run out of money.

The last several days there have been hints that Greek banks would not open on Monday, June 29th but Greek leaders promised they would. Well surprise! Now that the ELA has been frozen all of the Greek banks will be closed on Monday. Reuters is reporting there are new rumors that Greek banks may remain closed until the July 5th referendum. If and when they do reopen there are rumors that people will only be able to withdraw a maximum of 60 euros.

The reaction to these headlines is pressuring the euro currency lower. As of Sunday the euro had fallen about two cents against the dollar to $1.09, a new one-month low.

Economic Data

Economic data in the U.S. was mixed. The durable goods orders fell again. April was revised lower from -1.0% to -1.5% while May's durable orders came in at -1.8%, which was worse than expected. The decline was mostly due to a bid drop in airplane orders. The Markit U.S. manufacturing PMI posted its third monthly decline in a row with a drop to 53.4. This is the lowest reading in over a year.

The news was much more optimistic in the residential real estate industry. Existing home sales hit their highest levels since 2009 with May sales up +5.1% to an annual pace of 5.35 million. New home sales hit their best levels since early 2008 with a +2.2% jump in May to an annual pace of 546,000 units. Homebuilders Lennar (LEN) and KB Home (KBH) had bullish things to say about the market. They see strength across all markets. They're also seeing a nice improvement in the number of first time homebuyers.

Consumer spending saw its biggest one-month gains in six years with a +0.9% jump in May. At the same time consumer sentiment hit a five-month high in June with a rise from 94.6 to 96.1. Sentiment numbers are nearing the 11-year high we saw in January at 98.1.

Last week also saw the final Q1 GDP estimate. This was revised higher from -0.7% to -0.2% growth.

Another noteworthy event was a bounce in the number of active oil and gas rigs. Every week Baker Hughes publishes their active rig count. Last week the number of active rigs rose for the first time in 28 weeks. Oil rigs continue to decline and fell -3 to 628 but gas rigs rose by 5 to 228. The combination of the two rose by 2 rigs to 859. The last time we saw a big decline in active rigs was 2008-2009 when the rig count fell for 18 weeks in a row. Today the number of active rigs is near 10-year lows after a plunge from 1,931 rigs in September 2014. Believe it or not but U.S. oil production is still near 40-year highs at 9.6 million barrels a day in spite of the big drop in active rigs.

Overseas Economic Data

There was not much in the way of economic news in Europe last week. Any headlines would have been overshadowed by the Greece drama anyway. Looking East there was some improvement in Japan. The country said their household spending improved +2.4% in May. This was a +4.8% jump year over year. Japan's CPI rose +0.5% in May, which is good news since they have been worried about deflation. Japan's manufacturing PMI for June was a disappointment with a drop from 50.9 down to 49.9. Numbers under 50.0 suggest economic contraction.

China's HSBC manufacturing PMI is also under 50. The June PMI reading was 49.6, which was actually better than expected. Most of the headlines from China were focused on the country's stock market. It appears that the stock market bubble in China may have popped. Their main market indices are plunging. The Shanghai composite dropped -10% intraday on Friday and closed with a -7.4% decline. The Shanghai index is down -19% from its seven-year highs just two weeks ago.

Major Indices:

The S&P 500 is down three days in a row and posted a -0.4% loss for the week. Year to date the large cap index is only up +2.0%. Volatility in the market has faded. The S&P 500 has gone 174 days without a -5% pullback. We have not seen a streak that long since 2003-2004 when the index managed a 219-day streak. The index has gone 1,370 days without a -10% correction (although it got close with a -9.8% drop in October 2014).

Last weekend I suggested the 2,100 area would be support. The S&P 500 tagged its 100-dma near 2,095 on Friday before bouncing. The next support level is the recent double bottom near 2,072. If that level fails then we could see the S&P 500 drop to its 200-dma near 2,050. Below that the next support level is probably the 1,980-2,000 region.

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

chart of the S&P 500 index:

The NASDAQ composite was hitting new all-time highs earlier in the week. Unfortunately, like the S&P 500, the NASDAQ also fell the last three days in a row. Now that it's back below the 5,100 mark the nearest support is probably 5,000 and its 100-dma. Should the 5,000 level break then 4,900 and 4,800 are potential support levels with the simple 200-dma underpinning the 4,800 area. Year to date the NASDAQ composite is up +6.8%.

chart of the NASDAQ Composite index:

The move in the small cap Russell 2000 looks a lot like the NASDAQ's The $RUT was hitting record highs on Monday and Tuesday. The three-day market drop pushed the $RUT to a -0.38% loss for the week. This index should have some support at its multi-week trend of higher lows. If that trend line breaks then the 1,200-1,210 area is probably the area to watch for support. Year to date the $RUT is up +5.9%.

chart of the Russell 2000 index

Economic Data & Event Calendar

We have a holiday shortened week ahead of us. The U.S. markets will be closed on Friday, July 3rd for Independence Day.

It's the end of the second quarter (June 30th) and the beginning of a new month. That means lots of economic reports. Anybody not watching the Greek crisis this week will be looking at the U.S. labor market. Wednesday will bring the ADP report and Thursday we'll see the monthly BLS jobs data. Analysts are estimating +225,000 new jobs for June.

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

- Monday, June 29 -
Pending Home Sales
Greek banks closed (possibly all week)

- Tuesday, June 30 -
Case-Shiller 20-city home price index
Consumer Confidence survey
China's manufacturing PMI data
Greek deadline to make IMF payment ($1.7 billion)

- Wednesday, July 01 -
ADP Employment Change report
ISM Index
Auto and truck sales data
Eurozone PMI data

- Thursday, July 02 -
Nonfarm payrolls (jobs) report
Unemployment rate
Factory Orders

- Friday, July 03 -
U.S. market closed for Independence Day

Additional dates to be aware of:

July 5th - Greek referendum
July 29th - FOMC meeting (end of two-day meeting)

Looking Ahead:

Investors turned bullish last week, just in time for the Greek crisis to roil the markets. The American Association of Individual Investor (AAII) sentiment survey saw bullish sentiment jump from 25.4% to 35.6%. Bearish sentiment dipped to 21.7% while most traders are neutral at 42.8% of those surveyed. Even with last week's big jump in bullish sentiment we're still under the long-term bull market average of 38.3%.

Speaking of sentiment the majority of Wall Street analysts are still expecting gains for the S&P 500 between now and yearend. June 30th is the end of the 1st half. Currently the S&P 500 is at 2,101. Looking at the yearend targets for 27 firms, the average S&P 500 target is 2,231. That represents another +6.18% gain from current levels (or a +8.3% gain for the year). The lowest 2015 targets are in the 2,100-2,150 range. The highest estimates are for the S&P 500 to rally into the 2,350-2,375 region.

The Greek drama is sucking up most of the oxygen in the room so you may not have heard that ISIS is responsible for an outbreak of terrorist attacks on Friday. Reuters is reporting that ISIS fighters massacred about 150 civilians in Syria as part of a fight to retake the border town of Kobane. At least 37 people died in Tunisia when gunmen opened fire on tourists at a beach resort. In Kuwait 15 people are dead and another 50 were injured when a bomb went off near a Shiite mosque. In France two men have been arrested for ramming their car into the security gate of a U.S. gas company. The terrorists pinned a severed human head with Arabic writing on it to the factory gates. ISIS claims responsibility for all of these and they're urging their followers to launch more attacks on their enemies (Shiite Muslims and Westerners) during the Muslim holiday of Ramadan, which is June 17th through July 17th.

Meanwhile the Sunni Muslim country of Saudi Arabia continues to bomb rebel targets in their neighboring country of Yemen. Diplomatic talks between Saudi and the Iran-backed Houthi rebels broke down in Geneva so Saudi started air raids against targets again. Iran and the Houthis are Shiites.

Iran Deadline

Since I mentioned Iran we should note that June 30th is another "hard" deadline for the nuclear talks between Iran and the P5+1 countries (the U.S., Britain, China, France, Germany, and Russia). The West has threatened a number of concrete, unbreakable deadlines in the past and they were always postponed. Why does anyone believe Iran will respect this June 30th deadline?

Iran has been outmaneuvering a weak-willed U.S.-led negotiation over Iran's nuclear arms program for several years. Every deadline gets pushed back, which only gives Iran more time to build up its technology so it can make a nuclear warhead, a claim the country has denied. The current negotiations have been taking place over the last two years. President Obama wants to get a deal nailed down as another feather in his legacy cap. Israel has warned us multiple times that the current terms of the deal are a disaster. Now we're starting to hear from people on Obama's side of the table that are worried the current shape of the deal is a bad one.

I don't know why anyone is worried about a deal with Iran. It sounds like there is no deal. Everything the P5+1 want done are exactly the things that Iran's leadership have promised will never happen. The West wants Iran to reduce its ability to enrich uranium. They want Iran to allow unannounced spot checks on nuclear facilities and access to military sites to check on potential nuclear testing. I'd like to know what the negotiators have been doing for two years since Iran has never agreed to any of these. The West has promised to remove sanctions once Iran has accomplished these tasks while Iran wants the sanctions removed first.

Thankfully France seems to be the adult in the room and they won't agree to a deal unless Iran meets these qualifications. I can imagine it is hard to negotiate when Iran's Ayatollah Ali Khamenei condemned the west and said, "death to America" back in March this year. This past week, many of Iran's parliament members also took up the chant "death to America" after a vote on nuclear inspections. Yup, they definitely sound like they want to make a deal.

The Week Ahead

The week ahead could be a wild one. Greek PM Tsipras' surprise announcement for a referendum on July 5th would suggest there is absolutely zero chance of a deal getting done before the June 30th deadline. The ECB has cut off its ELA to Greek banks. These banks will be closed on Monday and potentially the rest of the week. Everything is suggesting that Greece will officially default on its IMF debt on July 1st. This is uncharted territory for the market. Ireland, Portugal, Spain and Cyprus all came close to defaults but were saved by massive bailouts. I am reasonably confident that Greece would be the first Eurozone member to actually default. The euro currency is falling against the dollar. The S&P futures are down sharply on Sunday suggesting we could see stocks gap down at the open on Monday morning.

~ James