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Stock Market Fireworks May Come Early with China’s Plunge and Greece’s Gap

June 26, 2015

We may not go quietly into the weekend. China’s flirtation with bear territory and the continued clod-footed dance between Greece and its creditors leave plenty for the stock market to chew over. Europe and U.S. stock markets have largely gone about their business in recent days, blurry-eyed from the back-and-forth in Greece’s negotiations that so far have been locked in stalemate. Still, the uncertainty has clearly capped upside stock potential.

Debt-strapped Greece reportedly has a few more days to iron out an economic-reform agreement with creditors ahead of a big IOU due next week, according to media reports. Updated reports this morning mentioned plans for a five-month bailout extension. But things are getting serious enough for German Chancellor Angela Merkel to tie in market impact. Merkel wants a Greek deal in place before markets open on Monday, the Guardian reports. Greece's $1.7 billion debt repayment is due June 30 to the International Monetary Fund. Finance ministers were slated to meet again on Saturday.

Greece uncertainty adds to the potential fireworks heading into a holiday-shortened week. Normally, traders might drawdown their trading activity, already eyeing next Friday’s Independence Day closure. That may still be the case, but there are a few matters at hand and the short list is Greece, China, and next Thursday’s early-release June payrolls report (expected to show continued improvement but leaving some questions over wage growth). Against this backdrop, the CBOE Volatility Index (VIX), the market’s “fear gauge,” has popped back above 15 in recent trading days (figure 1).



The CBOE Volatility Index (VIX) has inched above 15 a couple of times this week but has had a hard time staying there; it closed near 14 on Thursday . Data source: CBOE. Chart source: TD Ameritrade’s thinkorswim® platform. For illustrative purposes only. Past performance does not guarantee future results.

Year of the Bear? China’s Shanghai Composite Index fell 7.4% to 4,192.87 Friday, after a 13% loss last week. That puts the leading index some 20% off its recent peak—a move that some industry analysts define as bearish territory. In fact, the benchmark hit its highest level seen post-financial crisis as recently as June 12. The decline has taken root first in the startup stocks, shedding a quarter of their value since hitting record highs as a group earlier this month. No doubt, the turnaround has been swift.

Volume Surge on Russell Rollover. Stock volume could surge as trading wraps up today, the final leg of the annual shift in the small-cap Russell indexes. Index funds and exchange-traded funds have about $800 billion in investor money tracking Russell indexes, according to FTSE Russell research. Managers must buy or sell stocks as a result of the change and the flurry of activity can filter into the broader market. For instance, recent IPOs like Bojangles’ (BOJA), Etsy (ETSY), GoDaddy (GDDY), and King Digital (KING) will be added to the all-cap Russell 3000. On the other hand, several health-care stocks—a sector that has been outperforming the broader market of late—are exiting the Russell indexes because they’ve become big caps. Anyway, you get the idea of the churn under way. Watch for potential spikes in volume and volatility.

Nike: A Consumer Win. Nike (NKE) is an early gainer after issuing largely upbeat quarterly results late Thursday. Team swoosh said its sales rose 4.8% to $7.69 billion in the quarter ending in May compared to the same quarter a year earlier. Nike claimed revenue growth across most of its geographic markets and product lines, in a bullish sign of stronger consumer spending. The main drag on Nike’s results shouldn’t come as a surprise; management said continued pressure from a stronger dollar again weighed on revenue growth and future orders. In fact, excluding the impact of a stronger dollar, sales improved 13% in the reporting quarter.

Good trading,

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