There are so many things to say in reference to the result of the Greek vote, the French vote, the FOMC meeting this week, and the future of the European Union, but we don’t have room in this format. The fixation on Greece is amusing as the vote does not solve their problems, it only creates more potential challenges for the euro, the ECB and the IMF. My question on Friday remains, is this a buy on the rumor sell on the news event? Is there really a good reason for equity markets to rise on the election results? Or, does the market exhale on the results of delaying the ultimate issues of Greece and the EU? The initial reaction to the news will be today. The futures are not showing a big positive, nor are they showing a big negative. With that tidbit of data what are we watching this week at the market remains at a decision point on direction?
First, the response from investors on the outcome of the vote. When we left on Friday most were expecting a rally in stocks on a positive outcome in Greece. The vote was assumed to be pro-stimulus and staying with the euro, but time will tell. The initial focus is okay for the continuation in the EU for Greece. Now comes the work of putting all the pieces together again… My opinion remains that the party is far from over. The initial reaction isn’t the key to determining the impact, it is what happens in the coming weeks and months. Do they make the changes necessary? Jury is still out on this issue and far from done.
Second, the FOMC meeting on Wednesday is the next big event for investors. What if anything will the Fed do relative to stimulus? Rumor is more twisting. The last was so effective why not try it again. The good news is that the Fed really can’t do much in the way of causing harm to the US economic outlook with that activity. Another round of quantitative easing (QE3) would be a negative from my view and it is still a possibility. The outcome of the Greek election likely took it off the table short term, but the meeting which concludes on Wednesday is another key data point for investors relative to the stimulus rally in place since June 5th.
Third, G-20 meeting could offer some insight to the global economic outlook, but will also be a political theater for the world leaders. The focus will be Europe relative to Spain and Italy. What plan if any is there to bailout Spain’s ailing banking system? It will be a headline event without much in the way of substance.
Thus, we have plenty of news items to watch, but how will this impact the markets? More of the same volatility and hope. The S&P 500 index closed Friday at 1343 and above resistance. The follow through move faces plenty of overhead resistance points, but the key will be the perception of aide from the Federal Reserve in the form of stimulus on Wednesday. SPY, SPDRs S&P 500 Index ETF is on our watch list of opportunities. The DIA, Dow Diamonds Trust ETF cleared resistance at $127 on Friday and looks in position to take some leadership. The NASDAQ index has been lagging in this rally as the technology sector show any leadership. Watching the major indexes as we move through the week is our focus.
Looking at the sector scans we find the defensive sectors still leading overall. Healthcare, consumer staples, telecom and utilities remain atop the leader board. The consumer services, technology and financials are at resistance, but they are not providing any leadership on the upside. The dividend stocks have perfomed the best which is reflected in the current leadership of the defensive stocks. Energy picked up some steam last week of the hope of Europe improving. Oil moved back towards the $84 mark on the week, and is on our watch list this week as well.
The dollar is under pressure from the outlook for a ‘peaceful’ resolution the debt crisis in Europe. UUP, PowerShares US Dolllar Bullish fund could test support at $22.30, but I wouldn’t count the dollar out going forward. The euro will get a boost from the Greek vote, but the outlook for the European economy favors the dollar longer term.
Bottom line… not much changes in the way of volatility and hope. We will add positions as they make sense, we will not force positions on rumors. Take it one day at a time