The stock market breathed a huge sigh of relief and the S&P 500 index delivered its best weekly gain since March. The Greek debt crisis appears temporarily solved. The Chinese market crash has begun to reverse. Iran and the P5+1 nations actually agreed on something and a deal on Iran's nuclear program might actually get signed. With good news breaking out all over the world the U.S. equity market surged. Google put the finishing touch on the bullish week with a record-shattering, one-day surge in market cap of $65 billion. To put that in perspective, the bottom 400 companies in the S&P 500 large cap index have a market cap of less than $65 billion (individually).

The euro currency fell to six-week lows. This boosted the U.S. dollar to six-week highs. A rising dollar pressures commodity prices. Gold sank -2.6% for the week to close at multi-year lows near $1,132 an ounce. Silver plunged -4.7% to end the week under $15.00 an ounce - a new five-year low. Crude oil dropped -3.24% and closed under $51.00 a barrel. This weighed on energy stocks (-0.89%) and oil service stocks (-4.5%). Yields on the U.S. ten-year bond fell to 2.348%.

Economic Data

The U.S. Commerce Department reported retail sales in June slipped -0.3% while May's reading was revised lower from +1.2% to +1.0%. Economists had been expecting June to see a +0.3% gain. Eight of the 13 retail categories posted declines. It was a disappointing report and doesn't bode well for Q2 GDP growth. A good chunk of the decline was auto sales. If you exclude automobile sales then U.S. retail sales only fell -0.1% in June. The latest reading on motor vehicle sales saw a drop from a seasonally adjusted annual rate of 17.8 million in May down to 17.2 in June. This is still a very strong year for U.S. car sales with more than 8.5 million vehicles sold thus far in 2015.

The New York Empire State manufacturing fed survey improved from -2.0 to +3.9 in July. Unfortunately this was countered with a big decline in the Philly Fed survey. The regional fed survey for Philadelphia was expected to drop from 15.2 down to 12.0 but it came in at 5.7.

Inflation continues to rise. The Producer Price Index (PPI), a wholesale inflation gauge, rose +0.4% in June, which follows a +0.5% rise in May. Gasoline was a big part of the rise as fuel rose +4.3% in June. The core-PPI, which excludes food and energy, rose +0.3% in June. The Consumer Price Index (CPI), which is a retail-level look at inflation, rose for the fifth month in a row. The CPI reading for June rose +0.3% following a +0.4% jump in May. The core-CPI was up +0.2%.

The University of Michigan Consumer Sentiment survey slipped from 96.5 in June to 93.3 in July. Odds are this is a reflection of all the negative headlines in recent weeks and the rebound in the price of gasoline at the pump.

The NAHB housing market index, which is a confidence survey among the major homebuilders, improved from 59 to 60. Analysts were expecting no change. The NAHB index is now at its highest level since November 2005 and it should be a bullish indicator for the housing industry. Another data point on the residential industry was the monthly housing starts number, which surged +9.8% in June to an annual pace of 1.174 million units. Nearly all of this gain was due to a huge surge in multi-family construction. Apartment rents have been rising for years and builders are trying to cash in on the demand for rental units.

Federal Reserve Chairman Janet Yellen made headlines with her two-day testimony before the House and the Senate. The five-month trend of rising inflation is significant because Yellen said the Fed won't wait until inflation reaches their previous target of 2.0%. If it looks like the inflation trend is steady then they could pull the trigger early.

Yellen clearly stated she wants to raise rates and would like to do so this year. However, she said her Fed remains data dependent. Based on current forecasts they will raise rates but only if current growth trends remain intact. She also reminded listeners that when the Fed starts raising rates the trajectory will be very gradual (so as not to spook the markets).

One big fear is that Yellen raises interest rates too soon and squashes economic growth in the U.S. She wants to avoid a recession. Unfortunately our neighbor to the north, Canada, is officially in a recession. This past week a Bank of Canada governor didn't want to use the "R" word but did say Canadian GDP has turned negative for the first half of 2015.

Overseas Economic Data

Speaking of GDP growth, the Bank of Japan lowered their 2015 GDP forecast from +2.0% down to +1.7%. Another GDP headline was China's GDP. The last several weeks there have been multiple clues that the Chinese economy is slowing down. Yet somehow the country's Q2 GDP remains at +7.0%. This official report was widely criticized as being falsely fabricated by the government.

In other Chinese economic news their retail sales for June jumped +10.6% from a year ago. Estimates were for +10.2%. Chinese industrial production was +6.8% in June, which was also better than expected.

One of the biggest stories on China was their stock market. The government has been doing all it can to stop the bear-market plunge from its June highs and it seems to be working. Last week more than 500 companies removed their trading halts on their stock although that still leaves more than 500 stocks that are still halted. After a volatile week of trading the Shanghai index did manage to post a +2% gain.

Looking at Europe the European Central Bank left their interest rate policy unchanged at 0.05%. ECB President Draghi said there was no change in the ECB's current QE program, which is scheduled to last until September 2016. The Eurozone reported their industrial production for May fell -0.4% for the month, which was worse than expected. Eurozone CPI was unchanged in June but still up +0.2% from a year ago.


Thankfully Greece was no longer a market-moving story last week. Last Monday, after a long weekend of negotiations, Greek leaders and their EU counterparts agreed to the framework on a third bailout deal. This included 25 billion euros to recapitalize the Greek banks. On Thursday the Greek parliament voted in favor of the new austerity measures, which would pave the way for the new 86 billion euro bailout.

The ECB approved an additional 900 million euros to the Emergency Liquidity Assistance program that would help the Greek banks open on Monday, July 20th. Banks in Greece have been closed for the last three weeks. They are expected to open tomorrow but the cap on withdrawals is expected to remain at 60 euros a day although they're talking about allowing customers to withdraw multiple days worth at one time (possibly two or three days worth).

On Friday the German parliament approved the new bailout deal for Greece after German Chancellor Angela Merkel reiterated that debt reduction would not be allowed since it violates EU treaty. The International Monetary Fund (IMF) disagrees and does not think Greece will survive without debt reduction. They just issued another debt sustainability report on Greece that outlines why Greece will need major debt relief and restructuring.

Major Indices:

The S&P 500 index produced a +2.4% gain for the week and is now up +3.29% for the year. The index rallied past potential resistance near 2,100 and its 50-dma but stalled right at resistance near its 2015 highs. After an 82-point rally in less than two weeks the S&P 500 is arguably short-term overbought here but that doesn't mean it can't breakout higher in the week ahead.

The 2,130-2,135 area is immediate resistance. Above 2,135 would be new all-time high territory. Using a Fibonacci retracement tool on the two-week rebound we can estimate short-term support at 2,110 and the 2,095-2,100 area.

chart of the S&P 500 index:

The NASDAQ delivered a great week with the composite index surging +4.25% thanks to some big gains in many of its largest components. These are new all-time highs for the index.

After a 210-point rally in less than two weeks it does look short-term overbought and due for a dip. I'd look for broken resistance near 5,100 to be new support. The 5,250 and 5,300 levels are potential overhead resistance. Year to date the NASDAQ is up +10%.

chart of the NASDAQ Composite index:

The small cap Russell 2000 index ($RUT) did post a gain for the week (+1.2%) but it significantly underperformed its large-cap rivals. The $RUT seems to be struggling with resistance in the 1,275 area.

It's hard to say where the $RUT might go next. The 1,250 level could be short-term support while 1,280 and 1,300 are additional levels of overhead resistance. Year to date the $RUT is up +5.1%.

chart of the Russell 2000 index

Economic Data & Event Calendar

The week ahead is very quiet on the economic and event calendar. We'll see a couple of reports on home sales. Then on Thursday a couple of PMI reports from overseas. The two regional fed surveys are not market movers.

- Monday, July 20 -
...nothing significant...

- Tuesday, July 21 -
...nothing significant...

- Wednesday, July 22 -
Existing home sales data

- Thursday, July 23 -
Chicago Fed regional survey
Chinese manufacturing PMI
Japanese manufacturing PMI
Kansas Fed manufacturing survey

- Friday, July 24 -
New home sales data
Eurozone PMI

Additional dates to be aware of:

July 29th - FOMC meeting (end of two-day meeting)
Sept. 7th - Markets closed for Labor Day holiday
Sept. 17th - FOMC meeting, policy update, economic forecasts
Sept. 17th - Fed Chairman Yellen press conference

Looking Ahead:

The week ahead should be focused on Q2 earnings results. It's the second biggest week for Q2 earnings announcements with over 450 companies reporting (that includes a lot of companies not in the S&P 500). Investors and analysts will be focused on how companies are dealing with a slower global economy and the impact of a strong dollar (especially for big multi-national companies).

According to FactSet, analysts' estimates were forecasting S&P 500 Q2 earnings to fall -4.5% as of June 30th. Now that 61 of the S&P 500 companies have already reported that estimates has fallen to -3.7% earnings decline. This is significant since it would be the first quarterly decline in S&P 500 earnings growth since Q3 2012 (-1.0%) and the worst earnings decline since Q3 2009 (-15.5%).

The five-year average reveals that 73% of S&P 500 companies normally beat analysts' earnings estimates but only 57% manage to beat Wall Street's revenue estimate. Thus far, with 12% of the S&P 500 companies reporting, the Q2 earnings results are just a tiny bit below the long-term average.

FactSet pointed out that Healthcare stocks, Industrials, and Consumer Staples have the best track record at beating earnings estimates. Energy stocks, materials, and financials have the worst track record. There's a lot more earnings data on the FactSet website. You can View that data here (it is a .PDF file).

Apple (AAPL) will be the biggest earnings story of the week. The company has a history of beating earnings more than 90% of the time. Wall Street will be curious to hear what AAPL has to say about its smartwatch sales and how many people have signed up for their Apple-branded streaming music service. AAPL's earnings are expecting to rise +40% from a year ago.

Reuters ran an interesting article on Friday discussing the world economy. The U.S. and the U.K. are seeing enough growth that both countries are on the verge of raising interest rates. The rest of the world is not that healthy. As I mentioned earlier, Japan recently lowered their GDP estimates and they are in the midst of a massive QE program. China's economy supposedly grew +7% last quarter but the government has been very accommodative with a lot stimulus. Canada just announced they're in a recession. Multiple countries have cut rates in the last four weeks. If you count all the central bank actions this year there are 37 central banks that have reduced interest rates or added stimulus as they try to boost economic growth or stave off deflation (or both). You can read more about the global outlook here.

On a short-term basis the big cap stock market indices look overbought and due for a dip. Odds are any decline is probably an entry point as traders jump in to buy the dip. That's assuming the Greek deal doesn't fall apart, the Chinese market doesn't crash again, and the Iran deal doesn't crumble.

~ James