Equities continued their march higher on Tuesday in what was a quiet session of trading.
The Dow Jones Industrial Average, the S&P 500 and the Nasdaq Composite each gained 0.1%, and the Russell 2000 gained 0.3%.
Volatility in Chinese markets was largely ignored after the Shanghai Composite posted a big dump-and-pump in the overnight session, dropping as much as 4.7% before finishing with a 2.2% gain. The index is down nearly 12% from its recent high in what is its first excursion below its 50-day moving average since February.
Instead, focus remained on the situation in Europe as Greece’s recently unveiled bailout proposal — which mainly consists of large tax increases and pension contributions — is analyzed by creditors with just days left before a $1.8 billion payment to the International Monetary Fund comes due.
The chatter is that European institutions will push for approval of the proposal by the Greek parliament before taking it seriously, something that threatens to fracture the coalition government in Athens leading potentially to a new snap election. Wednesday will feature a meeting of Eurogroup finance ministers while political leaders will meet on Thursday. So expect Greece to continue to dominate the headlines.
If the current proposal is agreed to all around, it would extend the current bailout program by nine months — likely necessitating the activation of capital controls to stem the deposit outflows hitting Greek banks — and buying some time for a third comprehensive bailout program to be negotiated. The funds released would only be enough to keep Greece solvent through the end of August.
While stocks are taking this all in stride, the currency market is apparently starting to worry that the Greek bailout situation is going to get much worse before it gets better. The euro lost 1.4% in what was its worst one-day loss since May 19, pushing up the U.S. Dollar Bullish Index Fund (UUP) 1.2% in response.
That hit gold, which lost 0.6%; but crude oil couldn’t be stopped, rising 1.3% as West Texas Intermediate closed at 61.16. At the sector level, the tone was defensive as telecoms led the way with a 1.3% gain after analysts at both UBS and Barclays upgraded AT&T (T), which rose 2.5%. Vision system maker Ambarella (AMBA) surged 8.4% after a positive Mad Money mention while BlackBerry (BBRY) dropped 4.2% on a top- and bottom-line miss for fiscal first quarter results.
Technically, stocks remain range bound near the 18,000 level on the Dow — a level first touched back in December — as warning signs accumulate.
We’re a couple of weeks away from the start of the Q2 earnings season, which means the flow of corporate buybacks — a powerful source of buying demand for stocks lately — will slow. Bank of America Merrill Lynch reports that institutional traders are selling heavily, with net sales of $4.1 billion last week the largest the bank has seen since its data started in early 2008. And market breadth, or the percentage of stocks moving to the upside, remains weak.
At the same time optimism towards small-cap stocks in the Russell 2000 iShares (IWM), as highlighted by Jason Goepfert at SentimenTrader, has reached an extreme not seen since January 2014. Over the last five years this has happened 35 other times. Over the month that followed, the IWM posted a median return of -2% with a maximum loss of -4.1% versus a maximum gain of 1.9%.
Caution, I believe, is still warranted despite the knee-jerk positive reaction to the over-the-weekend proposal from Greece. Political and economic realities — mounting debt, the decay of the Greek economy back into recession, and a 50% youth unemployment rate — suggest a plan for more debt, more austerity and higher taxes isn’t going to play well in Syntagma Square.
Anthony Mirhaydari is founder of the Edge and Edge Pro investment advisory newsletters. A two-week and four-week free trial offer has been extended to InvestorPlace readers.
