Stocks moved lower Wednesday as dreams of an easy resolution to the Greek debt standoff came crashing back to reality. Headlines crossed that the European institutions and the International Monetary Fund have rejected Athens’ latest proposal. Greek officials have reportedly said it seems like the country’s creditors don’t really want a deal.
Basically, Greece proposed a deal full of more austerity — mainly taxes — which the IMF took, toughened, then added its original demands from a few weeks ago. Greece’s requests for debt relief are also being ignored.
The latest is that the Greek delegation has reportedly left the EU commission building in Brussels as European finance ministers may opt against inking a deal with Athens. Instead, they may prefer the Greek parliament to pass, on its own, new economic reforms before releasing the bailout funds needed to meet a $1.8 billion IMF debt repayment at the end of the month.
In other words, the situation looks likely to get worse before it gets better.
In the end, the Dow Jones Industrial Average lost 1% to close below the 18,000 level first reached in December, the S&P 500 lost 0.7%, the Nasdaq Composite lost 0.7% and the Russell 2000 lost 0.9%.
Crude oil lost 1.2% to close at $60.26 a barrel, lifting the ProShares UltraShort Crude Oil (NYSEARCA:SCO) recommended to Edge subscribers to a gain of 3.5% for the month. Treasury bonds were stronger, pushing the 10-year yield down to 2.4%. And gold lost 0.3%.
Material stocks led the decliners with a 1.3% loss while technology was helped by a 0.9% rise in Apple Inc. (NASDAQ:AAPL) and a 1.1% rise in Facebook Inc (NASDAQ:FB).
Also weighing on sentiment was a tweet from Carl Icahn that he sold out of Netflix, Inc. (NASDAQ:NFLX) today after shares spiked last night in response to the announcement of a Netflix stock split. The last time NFLX announced a share split, shares surged but promptly rolled over as the speculative excess exhausted itself. We saw something similar today, as NFLX stock finished with a loss of 0.4%.
In a note to clients, I recommended the July $680 NFLX puts to Edge Pro subscribers to profit from the comedown that looks likely for the streaming content provider.
Time is quickly running out for Europe to figure out what it’s going to do with Greece. Creditors are demanding more aggressive pension reform (something Athens has said is a “red line”), bigger defense cuts and a reduction in proposed business tax increases and higher sales tax rates.
If no deal is done by Thursday, things will start moving fast.
While Greece has an IMF payment deadline of June 30, Greece’s parliament still needs enough time to pass any mandated reforms that would be a condition of additional funds. If that happens, Greece would be in default, and the extension of the country’s second bailout program would end, leading the European Central Bank to possibly end its support of Greek banks. Bank runs and capital controls would surely follow.
Without an influx of cash — or the restoration of the national currency — Greece would soon run short of the money needed to pay wages and pensions.
Technically, stocks continue to look shaky here as traders look dangerously unprepared for a negative outcome on Greece. Jason Goepfert at SentimenTrader highlights the recent precipitous decline in the CBOE Volatility Index (VIX) — known as Wall Street’s “fear gauge” — as options traders haven’t felt the need to pay up for put option protection against market losses.
Goepfert notes that when the VIX has reached lows near current levels, the measure has rebounded over the following week 26 out of 28 times for an average increase of 14%. Over the next three weeks the VIX was higher 27 times, including every occurrence since 1994, with an average gain of 22% at its best point vs. an average loss of 1.5% at its worst.
In other words, the VIX’s decline reflects a strong sense of complacency that rarely lasts.
All of this suggests a growing risk of a surprise stock market selloff over the next month that could be caused by any number of catalysts: A Greek debt default, the start of the Q2 corporate earnings season, the July Fed policy meeting, and more. Investors would do well to stay on their toes. The July $17 calls in the iPath S&P 500 VIX Short Term Futures TM ETN (NYSEARCA:VXX) recommended to Edge Pro subscribers are already up by a third since added on Tuesday.
Anthony Mirhaydari is founder of the Edge and Edge Pro investment advisory newsletters. Free two- and four-week trial offers have been extended to InvestorPlace readers.
