In an example of truth being stranger than fiction, U.S. stocks rallied hard at the open on Thursday in response to a last-ditch effort by Chinese authorities to stem the collapse in their financial markets. By threatening to jail short sellers. No really. I’m not making that up.
After the Shanghai Composite fell nearly 3% in early trading — taking it below its 200-day moving average for the first time since last summer for a 35% decline from its high — shares ended with a 5.8% gain thanks to a report authorities would arrest “malicious” short sellers. In addition, major shareholders in Chinese companies were banned for selling stock for six months.
This was just the thing to reinvigorate animal spirits after the near four-hour NYSE shutdown on Wednesday and ongoing concerns about the fate of Greek bailout negotiations, although some of the shine was taken off as sellers cut the majority of the gains into the close.
In the end, the Dow Jones Industrial Average gained 0.2%, the S&P 500 gained 0.2%, the Nasdaq gained 0.3%, and the Russell 2000 gained 0.4%.
Financial stocks led the way higher thanks to a pullback in Treasury bonds, which lifted long-term yields and hopes of an expansion of net interest margins. The group gained 0.8%. Automated vehicle sensor maker Mobileye (MBLY) gained 5.1% after it was upgraded by analysts at Baird on new business acquisitions.
Greece has reportedly submitted its latest bailout proposal to its creditors ahead of a looming deadline on Sunday to iron out a deal to fund payment due to the European Central Bank on July 20 — without which support for Greek banks will likely be withdrawn, precipitating a crash out of the eurozone.
Reports suggest the proposal includes $14.4 billion worth of reforms in exchange for $55 billion in new funding. The Greek parliament will need to pass the plan Friday to kick start another weekend of negotiations.
Big questions remain. Will the proposal meet with the approval of Greece’s creditors? Will the Greek parliament approve the plan? And since this is seen as a short-term deal to facilitate a negotiation of a long-term deal, will Germany and other creditor nations finally acquiesce to debt relief for Greece?
For now, stocks remain vulnerable with the Dow below its 200-day moving average as market breadth measures continue to decline as fewer and fewer stocks remain in uptrends. Big catalysts, besides in the situation in Greece and China, also loom as the Q2 earnings season heats up next week while Federal Reserve chairman Janet Yellen will make appearances — to be closely analyzed for clues on rate hike timing — starting with a speech on Friday.
In response, I continue to recommend a defensive positioning include a July $125 put option position against Apple (AAPL), which lost another 2% today, which are now up 213% for Edge Pro subscribers since recommended on June 12.
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.
