Business and Financial Guido's Weekly Market Notes: Cash Building on the Sidelines

The financial markets begin the new week with a repeat of the volatility experienced last weekend in the global markets. The prospect of Greece exiting the euro and the risk that imposes has been an on-again-off-again threat for more than five years. This suggests that some measure of this event is already built into current prices.

Nevertheless, the uncertainty resulting from the “No Vote” will likely produce some early weakness and a potential retest of last week's lows near 2055 using the S&P 500. The flip-side is that despite the likelihood of increased volatility, the U.S. financial markets could benefit from a significant inflow of foreign capital. U.S. Treasuries are likely to experience another flight to safety, which could reduce interest rates pressures that have been building on the long-end of the market. The important intermediate-term support area for the S&P 500 is expected to be in the vicinity of 1975 to 2025.

Although conditions unfolding in Europe will be center stage there is also uncertainty surrounding second quarter earnings and Fed policy that could weigh on stocks. Second quarter earnings announcements will begin to flow this week. After subtracting out the results from the energy sector, corporate earnings are expected to have grown 2.0%. Earnings forecasts for 2015 have been ratcheting down since last September when it was thought the S&P 500 earnings would top $130 in 2015. More recently forecasts for 2015 earnings have dropped to $114, with $130 the number now associated with 2016. The prospects for the Fed raising interest rates in September have quieted with the June jobs report that was weaker than expected. Together with the less than stable situation in Europe, Janet Yellen's decision to normalize interest rates in 2015 becomes more difficult.

The technical condition of the stock market argues for a continuation of the trading range that has existed the past three months

although the parameters have widened with the breech last week of the 2070 level on the S&P 500. We are encouraged by the latest sentiment data that shows investors becoming more fearful. This suggests that substantial cash is building that could support the market in the second half of the year.

The move from complacency to fear is most evident in the latest data from the CBOE Options Exchange (CBOE). The CBOE reports a large increase in the demand for put options (investors buy puts in anticipation of a market decline). The CBOE Volatility Index (VIX) retraced its steps back to a 16 handle late last week but not before soaring to 19, which represents nearly a 40% jump last week. A VIX reading above 18 argues that fear has entered the building. In addition, the Ned Davis Trading Sentiment Index entered the excessive pessimism zone. This indicator has had a good history of signaling trading opportunities in the stock market when pessimism becomes excessive.

** Denotes Current Relative Strength-Based Overweight Sectors ** 1 ranking = strongest sector - 10=ranking weakest sector

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Evan R. Guido

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