We remain concerned about the lack of leadership in the markets. On June 29, we purchased some SPY (S&P 500 ETF) to gain some additional exposure to risk. We would like to see more from this rally before we broaden our horizons beyond the realm of the S&P 500 Index. If market interprets the outcomes in Greece favorably, we are well prepared to reinvest more cash. A close over 1,317 on the S&P 500, especially in a convincing manner, would make us feel more confident about the current advance.
The terms of any rollover proposal for Greek debt are very important. If the market believes bondholders are being given little, if any, choice then a “solution” may be interpreted as a default. Bloomberg reported on June 30:
Germany’s biggest banks and insurers and the government have agreed on a draft proposal to roll over Greek debt holdings, people familiar with the plan said. The financial firms will commit to providing financing for a Greek aid package and an announcement is planned this afternoon, said the people, who declined to be identified because the talks are private.
Looking at how an asset class is performing relative to the S&P 500 Index is an excellent way to understand the market’s current appetite for risk. Defensive assets, such as gold and the VIX, recently broke their S&P 500 relative strength trendlines in a bearish manner (see orange arrows below). These breaks tell us the desire to own the VIX, or the Fear Index, is waning relative to the desire to own stocks. While the changes shown below are short-term in nature, they do indicate an improving tone in the stock market.
Yesterday, we showed the three steps required for a trend change in stocks using a very short-term time horizon. Market analysis becomes more meaningful when developments occur in short, intermediate, and longer-term time horizons. The chart below shows two long-term forms of possible support for stock prices. The green line and lower blue line intersect somewhere in the neighborhood of 1,270 and 1,283. The S&P 500 did dip below these levels, which leaned bearish. However, it is not uncommon for support levels to be violated for short periods of time. In this case, the S&P 500 was able to fight back above 1,283.
The slope of the Summation Index has also improved which shows some conviction from buyers as measured by intermediate-term market breadth (percent of stocks advancing).
The S&P 500 still has to contend with (a) the 50-day moving average which sits at 1,317, and (b) the cluster of possible resistance shown below from the now tight band of moving averages ranging from the 15-week to 22-week; they sit between 1,314 and 1,317. The length of the candlestick on the far right side of the chart indicates significant interest from buyers. A more hesitant market and candlestick may be in the cards as we approach 1,317. If we get a bullish candlestick on the other side of 1,317, that would be a very good sign in terms of the market being able to rally further.
The term default has been heard quite a bit recently, which never sits well with bondholders. The Aggregate Bond Index ETF (AGG) looks vulnerable to some additional downside.