Greece And The Stock Market: Time For Concern?

Includes: GREK, SPY
by: Brad McMillan

This article originally appeared on the Independent Observer Blog.

It may be time to start watching the stock market more closely. Although I believe the general environment remains supportive, the uncertainty around the Greek bailout might be creating the conditions for a market pullback.

Is the Greek situation moving the market?

In mid-March, U.S. markets started to move higher after several months of back-and-forth trading. Economic news was improving, corporate earnings were coming in much better than expected, and one of the biggest headwinds, the strong dollar, was moderating.

That upward trend looked solid, but it's been broken in the past two weeks by a move downward - due largely, in my opinion, to market fears about what might happen if a deal isn't reached in the Greek crisis.

Over the past month, on a daily basis, there's been a pretty strong relationship between bad news on Greece and the market's movement. This has been particularly apparent in the last few days, as the Greek situation has deteriorated and the market has moved lower.

Although it's probable that a deal, however temporary, will be reached for Greece, I'm starting to pay closer attention to the market, which has either broken or is getting closer to breaking some important support levels:

  • It's broken the 100-day moving average and is getting close to the 150-day.
  • It's also broken the 2,080 level on the S&P 500, the lowest point since April.
  • This isn't particularly concerning yet, but we're getting closer to the 2,045 level, which is the 200-day moving average.

Should Greece actually default on its debts, we might see more pressure downward.

What to expect?

The total drawdown, as I write this, is a bit under 3 percent from the top - certainly nothing to worry about. Arguably, given recent interest rate volatility and the news from Europe, we should have seen a bigger drop; the fact that we haven't testifies to the overall supportive economic environment here in the U.S. A growing economy, improving corporate earnings, and a Federal Reserve policy that is still stimulative should all combine to keep bolstering the market.

With this in mind, I expect any pullback to be modest. At the same time, Greece isn't going away as a problem. The situation may boil over in the next couple of weeks, resulting in a more severe market pullback. Even if a temporary agreement is reached now, we can expect to see this issue pop up again throughout the summer, with the same potential for market disruptions.

As far as the effect on U.S. markets, we need to keep an eye on the support levels to see if they suggest trouble. Right now, my personal worry level is around 2,045 for the S&P 500 - only about 35 points, or less than 2 percent, below where we are right now.

But remember: Even if we do see a pullback below that level, any market decline due to Greece is very likely to be cushioned by better economic conditions here at home.