Daily Market Commentary

Week In Review: Stocks Fall As Greece Drama Continues

Stocks End Week Lower As Greek Drama Continues

Stocks fell hard on Monday after it became clear that Greece would default on its debt and literally shut down their entire banking system for the week. Greece missed its latest payment to the IMF and became the first developed nation to default on their debt in modern history. In an effort to move forward, the tiny nation-state will hold a referendum on Sunday (07/05/15) to see if they will keep the euro currency or revert back to their old currency, the drachma. The “big” story here is not just Greece – it is the precedent that will be set and the broader ramifications for the entire Eurozone. If Greece is allowed to get away with defaulting and missing payments, then other troubled countries in the Eurozone (Spain, Italy, Portugal, etc) will quickly follow and that could threaten the continent and the global economy. U.S. stocks remain under pressure as all the major averages continue to fall. The bulls showed up and defended the 200 DMA line last week for the S&P 500 and the Dow Industrials, it is very important to see last week’s levels hold. Otherwise, we are in for a much deeper pullback. The “good” news is that even with all the selling, the benchmark S&P 500 is only down ~3% below its record high.

Monday-Wednesday’s Action: Stocks Plunge On Greek Woes 

Stocks fell hard across the globe on Monday after Greece said it will default on its debt and shut its banking system for the week. Over the weekend, Greece said they will impose capital controls – which means they are closing their banks for the week, limiting the amount of money people may withdraw from an ATM to 60 euros a day and shut their stock market on Monday. Greece’s Prime Minister issued a referendum to his people for July 5 to vote Yes or No to stay in the Eurozone. These are unprecedented measures for a developed nation and I can’t remember a time in modern history where a major developed country shut their banking system for an entire week! Late Monday, S&P rating agency cut Greece’s debt further into junk territory as the country approached default. In other debt/default related news, Puerto Rico said it may default on their debt as well. The VIX (volatility index) soared over 30% as fear picked up and stocks plunged. Over the weekend, China’s central bank cut its reserve requirement to help stimulate their economy. Chinese stocks officially entered a bear market (defined by a decline of 20% or more from a recent high) on Monday. In the U.S. pending home sales rose +0.9%, hitting the highest level in 9 years, missing estimates for a gain of +1.2%. The Dallas Fed Manufacturing Survey slid to -7, beating estimates for -13.5.
On Tuesday the bulls showed up and defended the longer term 200 DMA line for the S&P 500 and the Dow Jones Industrial Average after optimism spread that a deal may get done in Greece. Later that day Greece officially defaulted on its 1.7B payment to the IMF making it the first developed nation to default in modern history. Economic data in the US was mixed, the Case-Shiller index slowed sharply to up +0.3%, missing estimates for a gain of 0.8%. The Chicago PMI remains sluggish and came in at 49.4, missing estimates for 50.6. Consumer confidence rose to 101.4 in June, beating estimates for 97.4.
Stocks rallied on Wednesday after news spread that Greece may accept new terms for a bailout and several Greek officials publicly urged the country to vote YES and stay in the Eurozone. Before the open, the ADP employment report showed private employers added 237k new jobs in June, beating estimates for 220k. The PMI manufacturing index came in at 53.6, barely missing estimates for 53.7. The ISM manufacturing index came in at 53.5, barely beating estimates for 53.2. Construction spending rose to 0.8%, beating estimates for 0.5%.

Thursday-Friday’s Action: Stocks Under Pressure As Greek Drama Continues

Stocks fell on Thursday after the government said U.S. employers added 223k new jobs last month missing estimates for 233k and the situation in Greece remained front and center. The International Monetary Fund warned that Greece’s would need an extension of its European Union loans and a larger debt writeoff if growth slows more than expected and economic reforms are not implemented. Greece’s banking system has been shut down all week which adversely affects their economy and raises chances of continued economic and social duress. The IMF added that Athens needs about 51.9 billion euros between October 2015 and December 2018 which is not an insignificant sum. Factory orders fell 1%, missing estimates for -0.3%. Sweden’s central bank lowered its main interest rate to -0.35% from -0.25% to hold down its currency. Stocks in the U.S. were closed on Friday in observance of the July 4th holiday.

Market Outlook: The Central Bank Put Is Alive And Well

Remember, in bull markets surprises happen to the upside. This has been our primary thesis since the end of 2012. We would be remiss not to note that this very strong bull market is aging (celebrated its 6th anniversary in March 2015) and the last two major bull markets ended shortly after their 5th anniversary; 1994-2000 & 2002-Oct 2007). To be clear, the central bank put is very strong and until material damage occurs, the stock market deserves the longer-term bullish benefit of the doubt. As always, keep your losses small and never argue with the tape. If you want exact entry and exit points in leading stocks, or access more of Adam’s commentary/thoughts on the market. Consider joining SarhanCapital.com.

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