Greece is the Word

I had another post written for today on a completely different topic but considering Monday’s unprecedented move I thought it would be worthwhile addressing that instead as it likely has some readers nervous. The DJ Industrials fell over 2% as the drama of a Greek exit from the Euro (Grexit) reached a crescendo and launched investor’s fears into overdrive. Price stopped just under the 200dma and right at prior (S1) support. Volume was elevated, but surprisingly low for such a dramatic move.

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From Jani Ziedin @ TheCrackedMarket

No doubt the holiday-shortened week contributed to this slower than expected volume. Of course it would be more accurate to state it the other way; our slower than normal week contributed to this outsized volatility. When big money is on vacation, markets are often less stable, especially when spooky headlines get involved.

Two-weeks ago we traded near all-time highs when many investors assumed a Greek compromise was all but signed. This week we crashed to the lowest levels since winter as investors assume the Grexit is all but assured. This is a great example of why smart money trades against the herd. When everyone assumes the deal is done, then it is priced in and there is little upside remaining. That is the perfect opportunity to take profits and wait for the inevitable problems to arise.

Let’s get one thing straight, the Grexit is a non-issue for anyone not living and working in Greece. Our financial system had five years to manage, hedge, and otherwise reduce exposure to a Greek default. Most Greek debt is now held by European governments who can weather these losses. For them it isn’t a big deal because they didn’t enter into these positions expecting a profit, or even their money back. All they were doing is buying stability and time. And given that they delayed the inevitable Greek default by five years, they did a pretty good job. While a few politicians might lose their jobs and damage their legacy over this, the financial system will survive without Greece because of the time they bought us.

This may sound strange but corrections like we experienced Monday are not what should be focused on. Instead what is most important is what happens afterwards. As a general rule if the market cannot take back at least 50% of a big down move higher in the following 2-3 days (the fewer the better), it is likely you will be in for further downside. Further downside finds S2 (17000) is the likely target if that were to occur. If the markets want to really sell off, a reasonable low end target comes in at S3 (16000). Considering the current seasonality it is my expectation it is unlikely we will see a major sell off without participation by the big money (major institutional managers) who have started their vacation season and don’t return until September. With that in mind does it really shock anyone that the worst market month for stocks is September?

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In the meantime the Greece debacle is not fixed, and closer to home we have our own “Greece” going on right here with what is happening in Puerto Rico. Normally summers are boring for market followers. Watching paint dry is typically more exciting but with the backdrop of these two developing saga’s I would recommend investors stay especially vigilant.