Stocks Dip as Greek Negotiations Break Down

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The situation in Europe is going from bad to worse as Thursday’s Eurogroup meeting of finance minister ended early in acrimony.

Threats are being passed around now with German Chancellor Angela Merkel warning that a deal needs to be done by the time markets open on Monday. Officials at the European Central Bank said they are re-evaluating their support of beleaguered Greek banks. And Greek Prime Minister Alex Tsipras boomed that his country rejected harsh demands from its creditors, including pension cuts, because it has “new priorities.”

Stocks, as you can imagine, reacted negatively to all this. The Dow Jones Industrial Average lost 0.4%, the S&P 500 lost 0.3%, the Nasdaq lost 0.2%, and the Russell 2000 lost 0.1%.

dow jones

Energy stocks were the laggards, losing out after crude oil declined 1% to close at $59.65 per barrel. That lifted the ProShares UltraShort Crude Oil (NYSEARCA:SCO) recommended to Edge subscribers to a gain of 5.7% month-to-date.

Technically, stocks remain vulnerable as breadth narrows, sentiment remains complacent and major support levels come back into play. As shown above, the Dow Jones will need to hold support at 17,750 or face a return to the December-February low near 17,000.

The timing continues to tighten, like a noose, around the necks of European officials. Reports are that Eurozone political leaders, who are meeting over the next two days, will not hold side discussions on Greece. That leaves the matter in the hands of finance ministers and their staff ahead of another meeting on Saturday morning.

The hard deadline is Tuesday when a $1.8 billion debt payment is due from Greece to the International Monetary Fund. IMF officials said they would not extent this payment deadline.

Someone has to give. The IMF wants Greece to rely less on taxes and the European establishment to grant debt relief to the country. Greece wants debt relief, higher taxes (if it must do austerity) and the protection of its tourism industry and pensioners. The Europeans want no debt relief, cuts to pensions and cuts to government workers, among other demands.

Even if these three groups can hammer out a deal, an agreement would still need to pass the national parliaments. This is troublesome. Leftist hardliners in Athens are clamoring for a debt default and exit from the eurozone, while a majority of German citizens, according to new poll data, want to kick Greece out of the euro.

Possible outcome include snap elections, a referendum on exiting the euro, and the resignation of Tsipras.

There was other news as well, but it was largely ignored. Obamacare survived another decision by the Supreme Court. Consumer spending heated up in May, rising 0.9% on a month-over-month basis beating the consensus estimate of 0.7% for the best result since August 2009. M&A remained in the headlines, with Bloomberg reporting that Aetna Inc (NYSE:AET) is closing in on a deal to acquire Humana Inc (NYSE:HUM).

But Greece remains the wooden horse in the room, potentially filled with a big, negative surprise of the type the market hasn’t had to contend with since 2011 — which is when we last saw a major market pullback featuring a meaningful increase in volatility.

VIX

I outlined three potential plays on a Greek default in a recent article. This inspired the recommendation of the July $17 calls on the iPath S&P 500 VIX Short Term Futures TM ETN (NYSEARCA:VXX) — which profits when volatility, currently depressed, rises — which are up 42% for Edge Pro subscribers since recommended on Wednesday.

Anthony Mirhaydari is founder of the Edge and Edge Pro investment advisory newsletters. Two- and four-week free trial offers have been extended to InvestorPlace readers.

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Article printed from InvestorPlace Media, https://investorplace.com/2015/06/stocks-greece-dow-jones/.

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