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Greek Drama Holds Stock Market Captive

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February 11, 2015

Stocks scratched back late Tuesday but that momentum fizzled in overnight and early action today. Wall Street, and much of the world, anxiously awaits a decision on how the big powers will help (or not?) debt-burdened Greece—decisions that impact the future of the European Union and could change the near-term course for U.S. stocks. Another potential market mover comes with the afternoon auction of 10-year Treasury notes. Its yield is a benchmark market interest rate that carries plenty of significance for the stock market. Will the 10-year rate continue its rise well in advance of any action from the Federal Reserve or will global uncertainty keep a bid in “safe haven” bonds?

And while we’re looking at important numbers, the S&P 500 (SPX) now has resistance at 2074 in its reach—a chart area that once established, could prove to be the launching pad to 2100. From here, former resistance at 2050 becomes pretty major support. Now, we talk about Greek drama and there’s plenty believe me, but interestingly, the CBOE Volatility Index (VIX) (see figure 1) continues to move in rather muted fashion. I’ll repeat: 2015 could be the year that VIX trends back toward long-run historical levels near 19-20. A relatively tame VIX is a gentle reminder that on potentially big news days, quick market moves could be followed with whiplash reversals. In other words, keep your heads. It may not pay to get sucked in by the first headlines.

FIGURE 1: RANGE BOUND? The CBOE Volatility Index (VIX) eased Tuesday but its intra-day moves have been contained. Data source: CBOE. Chart source: TD Ameritrade’s thinkorswim® platform. For illustrative purposes only. Past performance does not guarantee future results.

Twists and Turns. Rumors that Greece could get a six-month extension to its bailout program helped the market although was quashed on Tuesday by Germany’s finance minister. Greece’s current bailout plan expires on Feb. 28, and some fear it will run out of money before then. If a deal isn’t struck today, then a summit of European Union leaders on Thursday could offer up the chance for more high-level negotiations. That’s a lot of short-term uncertainty for traders and investors that wonder if a sinking Greece could pull under other vulnerable European Monetary Union countries, and in a domino effect, continue to plague the broader Continent. Some analysts are quick to note that while sovereign debt crises roil markets short term, the U.S. stock market has largely deflected major debt market contagion. You may recall the 1990s and the decade of emerging market mayhem in in Mexico, Thailand, and Russia (that one brought on the sinking of Long-Term Capital Management). But truth be told, it’s hard to know just now how the Greece situation will shake out. And it’s certainly hard to focus on earnings with big-picture volatility all but suspending action.

Spring Awakening? Builder KB Home (KBH) is an early gainer after it said preliminary new orders are up 25% in the quarter so far. The numbers prompted execs there to express their optimism for the spring selling season. KB Home’s net order value is up 26% to $519.2 million in the period. Bullish news for this issue but perhaps more evidence that decent, yet still disappointing, home sales have turned the corner. Think there hasn’t been some uncertainty for this valuable sector of the economy? KBH may have gained in early action Wednesday but its stock is down some 20% in the last three months.

Brawny Buck Whacks Pepsi, Too. A strong dollar flattened PepsiCo’s (PEP) fizz, similar to commentary from rival CocaCola (KO) earlier this week. PEP said Q4 revenue and profit fell as foreign-currency effects weighed. Wall Street analysts had factored this in so, in fact, results still came in above Street expectations. Revenue did benefit from continued strength in the company's Frito-Lay unit as snacks are proving to be a stronger seller in some regions due to changing tastes around soda. This revenue snapshot gives some sense of consumer demand and global economic impact: at the Frito-Lay North America unit revenue grew 3%; revenue was up 1% at the PepsiCo Americas beverage unit; revenue fell 2% at the Quaker Foods segment; revenue dropped 10% in Europe.

Good trading,

JJ Kinahan

JJ began his career in 1985 as a Chicago Board Options Exchange...

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