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The S&P 500 jumped 1.1% to close at 2,099.6 on Monday and broke out the 100 day-SMA, after Greek Prime Minister Alexis Tsipras finally capitulated and accepted the framework for the third bailout on Sunday. The package of reforms was approved by the Greek parliament on Wednesday. The Germany's Bundestag lower house of parliament voted in favor of moving ahead with the bailout deal on Friday, which allowed Angela Merkel’s government to start negotiations with Greece.
On Tuesday, the S&P 500 advanced for the second day in a row and closed above the 50-day SMA for the first time since June 24, after the U.S. Department of Commerce said that retail sales unexpectedly dropped 0.3% in June, missing the median Bloomberg economists’ forecast of a 0.3% gain. Core sales, the figures that are used to calculate gross domestic product (GDP) and which exclude such categories as autos, gasoline stations and building materials, declined 0.1% last month, missing the expectations of a 0.3% gain.
Weak June retail sales could make the Federal Reserve think twice about raising the rate by September. After the last two-day Federal Open Market Committee (FOMC) meeting in June, the Fed sharply downgraded their economic forecast for this year to between 1.8% and 2.0%, from the previous forecast in March of between 2.3% to 2.7%.
The S&P 500 closed down 1.55 points on Wednesday after Fed Chair Janet Yellen made comments during a semiannual testimony in front of the U.S. House Financial Services Committee that the Fed is going to raise the rate between September and December this year, regardless of weak June retail sales and nonfarm payrolls reports. Ms. Yellen could be under pressure as some Fed members are concerned that the Fed might be falling behind the curve. Another concern is that the Fed could be running the risk of losing control of bond yields if they don't do anything after a lot of hype.
Since the Fed committee removed the key word "patient" from its March 18 statement, the 10-year U.S. Treasury yield has skyrocketed 21.61%, from 1.93% on that day, to 2.347% on Friday. Bond king Jeffrey Gundlach, CEO of the DoubleLine Capital with about $46 billion under management, disagreed with Ms. Yellen and said the Fed won’t raise rates in 2015.
Separately, China’s National Bureau of Statistics reported on Wednesday that second quarter GDP grew 7% year-on-year and cited improvements in the economy had been “hard won.” The headline GDP beat the median economists’ forecast of 6.8%. Several economists suggested that the GDP would be closer to 5% if measures of growth based on freight rates, electricity output and other data were used.
The U.S. dollar has surged 1.65% against the euro since Wednesday, after ECB President Mario Draghi said the bank increased emergency liquidity assistance (ELA) to Greek banks by €900 million over one week, meaning total ECB exposure to Greece now stands at €130 billion. The currency market may have seen the ECB’s move as a sign that Greece’s third bailout deal could become another kicking the can down the road.
Eurozone finance ministers also decided on Thursday to offer a €7 billion bridge loan to Greece from the European Financial Stability Mechanism (ESM) fund, despite opposition from the U.K., as a €3.5 billion debt payment to the ECB is due on July 20 and the Greek banks are still shut.
For the week, the S&P 500 surged 2.41% to close at 2,126.64 on Friday. The best performing S&P 500 sectors for the week were Information technology and Financials, up about 5.26% and 3.00%, respectively. Shares of mega cap stocks in the S&P 500 Information technology sector, Google [NASDAQ:GOOGL], Facebook [NASDAQ:FB] and Apple [NASDAQ:AAPL], lead with 25.81%, 7.98% and 5.14% gains, respectively. Investors also bought shares of companies in S&P 500 Financials in anticipation of improved net profit margins across the banking industry after the Fed hikes the rate.
The worst performing sectors for the week were Energy and Materials, down 1.09% and 0.14%, respectively. WTI crude oil prices tumbled 3.86% this week, after the P5+1 countries and Iran agreed on the nuclear deal, meaning millions of barrels of Iranian crude will come to market, adding to the glut. Investors worry that a collapse in Chinese stocks would lead to a broader downturn in the real economy of China, the world’s top consumer of industrial metals.
The Barclay Hedge Fund Index, which is a measure of the average return of all hedge funds, excepting Funds of Funds, in the Barclay database was unchanged for the week. Hedge funds might have been caught by surprise as they were doubling down on short positions of S&P 500 futures.
As of July 14, there are 264,846 short positions of S&P 500 Futures, (CME:SP), traded on the Chicago Mercantile Exchange (CME), by asset manager/institutional and leveraged funds, compared to about 122,930 long positions, according to the Commitment of Traders (COT) data released by the Commodity Futures Trading Commission (CFTC) each Friday. The net short positions has increased by about 2,716 contracts from last week, where contracts of S&P 500 futures are traded in units of $250.00 x S&P 500 index. We anticipate the net long positions to increase when the CFTC reports its COT data next Friday.
From our technical viewpoint, the S&P 500 bounced off the trendline support at 2,044.56 and broke out the technical head resistance of the ascending triangle at 2,120. If the ascending triangle breakout is confirmed, the projected price is 2,260, with the next head resistance at 2,134.72. It should be pointed out that only three sectors of the S&P 500 outperform the broader index year-to-date, and earnings season has just begun.
S&P 500 Summary: +3.29% YTD as of 07/17/15
Barclay Hedge Fund Index: +3.47% YTD
Outperforming Sectors: Healthcare +12.33% YTD, Consumer discretionary +9.63% YTD and Information technology +5.19% YTD.
Underperforming Sectors: Consumer staples +2.95% YTD, Financials +2.56% YTD, Telecommunication services +1.23% YTD. Materials –2.06% YTD, Industrials –2.58% YTD, Utilities –8.34% YTD and Energy –9.33%
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