Is Greece Going To Sink The Market?

Includes: SKF, SPY
by: Jason Cimpl

The market once again pushed higher yesterday. Volume ticked up, and banks were the top performers. And S&P 500 (SPX) (NYSEARCA:SPY) was also able to break past 1197 resistance and challenge 1220 resistance, which is a strong area of selling pressure. Although that breakout past 1197 was a bullish event, the indices may need a few days to regroup after a huge 15% rally over one week.

I do not think I will go short any time soon. Even though I expect a slight decline, the bulls look too formidable and being bearish now doesn't fit the TradeMaster trading strategy.

But I do recommend you increase stops and lock in those gains from last week. Since my personal strategy is more aggressive, I opened SPY puts when the index tagged 1220 and currently have them open, but I intend on selling those today.

Now that SPX is back over 1175, I would expect that area, then 1155, to stabilize any move lower. And with earnings season under way, as well as the increased volatility in the dollar, we can expect that the market will experience big swings over the near term.

This morning, JPMorgan (NYSE: JPM) was first of the big banks to report third quarter earnings. The results were not good, but they were not bad either - considering the huge decline to banks over the past three months. Despite the unpleasant results, JPM managed to report EPS of $1.02 that still beat analyst estimates of $0.92.

After digging a little deeper this morning, a large portion of income was from adjustments to debt. While it's still real income on a GAAP basis, JPM isn't going to make money over the long term by revaluing its debt to increase its equity balance. The stock is down about 5% and most other banks look positioned to move lower.

Speaking of financials, I received an email with a question yesterday, that I have covered in the past, but haven't spoken much about for a few weeks; and it's really a great inquiry.

George asks,

"We all know Greece will have to default in the coming months and I would think the bank stocks will take it on the chin on the day that is announced and possibly the weeks following that. Is there a logical way to play that before the announcement comes?"

I've said it before, but I will say it again; Greece means nothing. While trite, it is true; Greece means absolutely nothing for the global economy. It has a corrupt government and even in the best of times its GDP would be about a percent of the world's total. It is a small fish in a very, very, big pond.

But that small fish is part of the EU. And the EU was formed so that small fish could compete economically and politically like big fish, as in France, Spain, and Germany. Since the whole point of the EU was to provide stability to its members, investors freak out when a member nation gets left behind. Because if one nation, Greece, is left behind; what nation's next? Portugal? Italy? Spain?

Greece is not a worry for the market as long as the EU is willing to support the country. But fallout and the risk of other members leaving the EU is a big cause for concern - hence the near 30% decline in the market over this summer.

George is right though, banks would be hit the most if the worst occurs in Europe. After all, that's why I bought the ProShares UltraShort Financials ETF (SKF) back in September; twice. But the potential bailout being worked up by the EU, and with help from ECB, will take the worst case scenario, an all out systemic collapse, off the table. And as such, I am not inclined to trade anything with a bearish bias, much less banks.

But George specifically asked for my opinion on Greece. While I don't view Greece as an issue, a slowdown in Europe would be a big deal.

The EU is prepared to offer more aide, but if the European economy worsens drastically, Spain, Portugal, Italy, and a host of other nations would likely need aid quickly. And those countries would need far more money than Greece to stabilize their economies quickly. If you are itching to be bearish, then focus more on European economics than Greece.

Google (Nasdaq: GOOG) reports this afternoon after the bell. And while I like the company, I am concerned that it will miss on revenue due to lower prices.