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Will Greece Pull Out the Rug on Patient Bulls?

February 17, 2015

February’s first two weeks sure have rewarded patient investors. But an impasse in Greek debt talks may grate on some nerves and once again grab headlines away from domestic issues and earnings results.

With Greece in limbo, the potential for global market disruption hangs over a relatively quiet week of limited economic data and a tapering calendar of earnings. And, U.S. markets are returning from a long weekend to play a little catch-up.

Reports Monday reveal that talks among euro-zone finance ministers over a new financing arrangement for Greece broke down abruptly. It’s an impasse that carries heightened uncertainty about Greece’s future inside the currency bloc, and overall, about the strength of the euro and exposure by regional growth engines Germany and others.

The meeting breakdown came after Greece rejected an extension of its current 240-billion-euro ($272 billion) bailout program under the conditions being offered by other ministers, the Wall Street Journal reported. Prime Minister Alexis Tsipras and his finance minister, Yanis Varoufakis, oppose the terms of that rescue deal, which expires at the end of the month.

So now it’s wait-and-see once again as far as Greece is concerned.

A Record High Nonetheless

For U.S. stock bulls, patience had paid off to start the month. The S&P 500 (SPX), which shed 3.1% in January, scrapped and pulled its way higher. In fact, that grind was enough to land the broad index in fresh-record territory late last week. Now a two-week, 5.1% rally so far in February has more than wiped out the losses suffered in the first month of 2015.

The market’s so-called “fear gauge,” the CBOE Volatility Index (VIX), is on the move as well. VIX slipped below 15 for the first time in 2015 (see figure 1). Specifically, the volatility index lost 0.59 and was down to 14.75 Friday, closing at its lowest levels since December 26. It’s dropped more than 30% over the past two weeks.


The CBOE Volatility Index (VIX) ended last week below 15, down some 30% from where it started February. Data source: CBOE. Chart source: TD Ameritrade’s thinkorswim® platform. For illustrative purposes only. Past performance does not guarantee future results.

Recall that a wide range of factors were blamed for the S&P 500’s losses and the market’s relatively wide daily moves last month. On that list: the steep fall in crude oil prices, worries about Europe’s economic health ahead of debt-strapped Greece’s elections, and a lackluster start to the Q4 earnings reporting season. Truth is, few of these “issues” have been resolved.

Now that volatility in the energy and currency markets (the euro had been setting the tone) might be easing after the uptick in January, the last batch of earnings over the next two weeks could be a decisive factor in determining if the steep slide in VIX is justified, or might continue. This week’s earnings list includes the world’s largest retailer, Dow component Wal-Mart (WMT).

Traders return from a three-day weekend to a light economic calendar (see figure 3 at post’s end). Data on housing starts, wholesale inflation, and industrial production might stir up some interest Wednesday. Thursday’s offering of jobless claims, the Philadelphia Fed’s economic gauge, and leading economic indicators round out the roster.

Minutes from the Federal Reserve’s January meeting hit on Wednesday; the markets await further clues about the speed and aggressiveness of interest rate tightening.

Just to keep things interesting, February options expiration on Friday could potentially affect volatility in the week ahead.

Calm All Around?

While VIX tracks the implied volatility priced into short-term SPX options, a wider look at volatility measures reveals widespread declines since January. For instance, the CBOE NASDAQ-100 Volatility Index (VXN) has fallen nearly 30% month-to-date. Implied volatility in the Dow Jones Industrial Average (as measured by the CBOE DJIA Volatility Index [VXD]) and in small-cap stocks (as measured by the CBOE Russell 2000 Volatility Index [RVX]) have also experienced substantial declines.

Volatility is easing across other asset classes, but not to the same degree, which could keep alive the potential for a volatility rebound for equities.

Of note, the CBOE Crude Oil Volatility Index (OVX) is designed to track volatility in the oil markets and has eased 4% this month as crude futures markets rallied to push U.S.-traded crude prices back above $50 a barrel (see a range of volatility measures, all declining, in figure 2).

FIGURE 2: WIDESPREAD VOLATILITY DECLINE. Commodities and emerging market volatility join in on the broad-based decline, but to a smaller degree than stock measures. Data source: CBOE. For illustrative purposes only. Past performance does not guarantee future results.

Small World

So, the rear-view mirror clearly shows volatility was in decline, though to varying degrees, even as markets rose and fell with the ups and downs of early Greek negotiations. Soothing the bulls, perhaps, the Federal Reserve remains convinced that the U.S. economy can ride out overseas turbulence barring further unexpected deterioration (let’s pay close attention to global commentary in this week’s Fed meeting minutes).

But that’s the thing about volatility. You can only pay so much attention to the rear view. What really matters is down the road. Greece, thank you very much, has just delivered a few more bumps.

Good trading,


This week’s U.S. economic report calendar. Source:

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