Okay… I am not going to say anything about the Greece deal to gloat, but the Greece agreement with the IMF and the EU slipped away when the EU didn’t accept the terms of the agreement… YET! I like the fact the media is holding on to the glimmer of hope they will still reach an agreement. Eventually the market will believe the default is priced into the markets and this will be just another headline. As stated many times… just default or cut a deal… either way just quit talking about it, take action. Greece is only one of the original pieces of the PIGS story. Don’t forget that Portugal, Italy and Spain are not out of the woods yet as they continue to struggle economically and have mounting debt that could end in default .
GDP now shows a contraction of 0.2% for the first quarter as reported early today. That is old news, but it does put in perspective how bad the first quarter was. The focus is shifting now to the second quarter with the close only six days away with only four trading days. Some are estimating 2% GDP for Q2 and my view is that is very optimistic. I would believe in the 1-1.2% range is more realistic. Investors have bought into the growth picture from the Fed and that is keeping the buyers engaged. The challenge is clarity across the markets due to speculation having the upper hand in the absence of true leadership for the economic outlook. Patience remains the theme for now.
Small caps led the downside on Wednesday dropping 0.9%. This sector has been leading the other major indexes higher, but today showed some cracks in the armor. IWM tested the $127.87 near term support. We have our stops at the $123.75 for now. One day does not make a trend… nor does it establish a direction. The goal is to hang in there and see how this unfolds near term.
Treasury bonds rallied on the worries in Greece seeing money flow into “safety”. TLT held support at the $115.50 level and bounce to $116.87. Yield on the ten-year treasury fell four basis points… not exactly what I would call a flight to “safety”. This remains a sector riddled with fear mongering from the media and analyst alike. If you own bonds and expect a decline of 10% you can hedge your positions during the turn lower to protect the principle erosion. The analyst community would rather instill fear to get you to sell the bonds versus finding a way to hold the assets, hedge the risk and continue to receive your income from the dividends. It takes work to accomplish, but it is still a part of the money management so many are taking on themselves. Remember, it is about deciding what you want your money to do, not playing a game of ‘hot potato’.
Lennar (LEN) reported earnings beating forecast and the share jumped 4.4% in trading. This in turn helped validate the rise in the homebuilders (XHB) that has been rising on the strength of sales and supply. We added this on the pattern break from the elongated trading range. The outlook is improving fundamentally, but we still have to manage the risk of sector going forward.
There continue to be opportunities, but they are well defined and news supported moves. The overall the market remains in transition and it is looking for the catalyst to redefine the trend… up or down. The NASDAQ remains the strength of the markets near term, but the consumer has shown some increase in spending the last quarter which in turn has produced some optimism. The Fed is responsible for the other side of the optimism keeping investors believing things are improving. Only time will tell and with the heat of summer in full swing it may get even more lethargic near term.