Friends,
It seems like we have seen this movie before. The markets continue to focus on the problems in Greece, as the Eurozone folks try to come up with a way to continue to delay what seems like the inevitable. At some point, the world will have to actually deal with the fact that the Greeks are just not likely to be able to pay their bills. In the meantime, politicians continue to kick the can down the road and attempt to delay the day of reckoning (does that sound familiar?). The feared “contagion” has markets trying to figure out who is going to be left holding the bag, and what kind of collateral damage will financial systems incur, should or when the inevitable occurs.
In the meantime here at home, stocks are trying to avoid their seventh straight losing week as today’s “quadruple witching” has stoked quite a bit of volatility this week. Again, we are concerned that stocks could struggle as the summer progresses, and we are keeping a sharp eye on a couple of support levels. First, 1257 on the S&P 500 is the 200 day moving average that would be important to hold, and then 1249, the March “Japan crisis” low, becomes a major line in the sand (which would also represent a 10% pullback from the highs in April).
Economic news continues to be a headwind to stocks as various PMI (purchasing manager’s index) reports show a slowing economy. Is the slowdown temporary, being the result of the Japan crisis and the rise in gasoline prices, or is the economy heading into a new leg of a recession? Interestingly, oil prices have dropped quite a bit this week and would seem to be a benefit for the economy going forward, if that trend can continue. The other positive that is developing, is the increasing amount of pessimism amongst market participants. The upbeat feelings about the market earlier in the year have dissipated. Money flows, which had been fuel for stocks up until April, reversed in May with stock mutual funds seeing money outflows for the first time this year.
Where does this leave us? Well, we suspect another band-aid will be put on the Greece wound, and here at home, after a lot of political posturing, we will get the debt ceiling raised and some sort of budget compromise will occur. In the meantime, stocks will have to wait until mid-July, when earnings season begins, to find some form of footing (assuming of course, the earnings will be relatively good). We suspect the next few weeks will be driven by macro news and stocks will struggle to find sponsorship or, at the very least, be quite volatile. We are encouraged by the amount of pessimism that has developed, and that along with these lower prices could set the stage for a nice rally later in the year.
As always, we will keep you informed as to what transpires in these volatile times.
Have a nice weekend everyone.
