Greece: Why Greek Fear May Be Market Friendly (SPY, VGK, FXE, VEU, DBC, SMH, TLT)

Chris Ciovacco: The video below highlights areas in several markets, including U.S. stocks (NYSEARCA:SPY), foreign stocks (NYSEARCA:VEU), commodities (NYSEARCA:DBC), semiconductors (NYSEARCA:SMH), and Treasuries (NYSEARCA:TLT), that give the short-term nod to the bulls. As of Friday’s close, the odds continue to favor some type of bottoming process that is well underway. Obviously, the Greeks may have something to say about the future direction of asset prices. A table of contents for the video is shown at the 42 second mark.

After you click play, use the button in the lower-right corner of the video player to view in full-screen mode. Hit Esc to exit full-screen mode.Video: Investment Outlook

Video: Investment Outlook

If you have been following the situation in Europe (NYSEARCA:VGK) closely, you know the vast majority of Greeks want to remain in the euro. The current election has been billed as a vote to “stay” or “go”. Under those conditions, it seems rational to believe most Greeks will let their fear of the unknown (leaving the euro) trump their anger at conservative leaders who helped create the disaster we call Greece. From a June 15 Daily Beast story:

Another recent poll shows that 8 of 10 Greeks want to stay in the euro zone, even if it means tougher times ahead. Returning to a modified drachma would bring bigger problems still, not least of all a return to rationing of food, fuel and medical supplies while the new currency is put into place. That fear is lost on no one. By Sunday, many of the top party leaders will likely have struck secret deals to bring the smaller party support to the negotiating table to form a coalition that can steer Greece clear of the edge of the abyss. If they fail this time, Greece is out of chances.

If the fear of leaving the euro (NYSEARCA:FXE) wins out over the justifiable anger, the election this weekend should be market favorable, or at least not clearly market unfavorable. None of us know what will motivate Greeks in the voting booth, but with a strong finish to trading on Friday, the markets seem to be positioned for a less-than-cataclysmic outcome in Greece. The charts below show markets that appear to be making a strong attempt at a bullish turn.

Even if the Greek election proves to be market friendly at first blush, a government still needs to be formed. Any delays after the election could lead to short-term solvency problems for Greece. From a June 17 Financial Times story:

A delay in forming a coalition, or in the worst case, a recourse to a third election if negotiations fail, could cause Greek public finances to collapse. Officials at the finance ministry said last week that unless a delayed €1bn tranche of EU-IMF funding is paid, funds to pay pensions and public sector wages would be exhausted by July 20.

A possible gain for the bulls could come in the form of a boost for Europe’s firewall, a bailout chest designed to stem the spread of the crisis. From a June 16 Bloomberg story:

World leaders meeting in Mexico will agree to boost the $430 billion firewall the International Monetary Fund announced in April, host President Felipe Calderon said. “I estimate that there will be a larger capitalization than the pre-accord reached in Washington, which will be finalized here, but I don’t want to speculate by how much,” Calderon told reporters yesterday in the coastal resort of Los Cabos.

Bloomberg provided a good summary of what happens after the polls close in Greece on Sunday:

Exit polls will be released when voting ends at 7 p.m. in Athens, with a first official estimate due around 9:30 p.m. The final polls, published on June 1, showed no party set to win a majority. The election marks a revote after the May 6 ballot failed to yield a government.

A Sunday Wall Street Journal article describes the ultra-short honeymoon period for the next Greek leader:

Whichever party wins Sunday’s Greek vote will face Olympian hurdles with a central government facing a cash crunch within weeks, an economy in free fall and an angry public exhausted by two years of austerity measures. Greece’s reform program is also well off track, following weeks of political paralysis. The first task facing Sunday’s winner will be to come up with €11.5 billion—maybe more—in new austerity measures being demanded by the country’s creditors but which could further inflame public opinion. With state coffers running dry and a new bond redemption pending in August, Greece’s party leaders will be under tremendous pressure to avoid a political deadlock this time.

Our approach has been to monitor the health of the markets and adjust accordingly, while placing an emphasis on flexibility. Accordingly, we have tentatively reduced our large cash position in the last two weeks. If the bulls can maintain their short-term momentum, we are open to adding to the risk-on portion of our portfolio. Conversely, if the situation in Europe morphs into a deflationary snowball, flexibility will call for pushing the retreat plans to the forefront once again.

Written By Chris Ciovacco From Ciovacco Capital Management, LLC

Chris Ciovacco began his investment career with Morgan Stanley in Atlanta in 1994. With a focus on global macro investing, Chris uses both fundamental and technical analysis to assist in managing risk while looking for growth opportunities around the globe in all asset classes. If you are looking for an independent money manager or financial advisor, Ciovacco Capital is worth a look. Chris graduated from Georgia Tech with Highest Honors earning a degree in Industrial and Systems Engineering in 1990. His experience in the professional ranks began in 1985 as he began working as a co-op for IBM in Atlanta.

Ciovacco Capital Management, LLC (CCM) is an independent money management firm serving clients nationwide. By utilizing extensive research, disciplined risk management techniques, and a globally diversified approach, CCM prudently manages investments for individuals and businessowners. Our focus is on principal protection and purchasing  power preservation in an ever-changing global investment climate.

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