US stock futures are down nearly 2% Monday morning mainly due to resurgent fears about a possible Greek debt default. Last weekend, Greece was able to avert a bond default, and it triggered another week-long short squeeze, something we have grown accustomed to during the last month of wide range-bound action. The question now is whether this dip will be buyable, or we will see another wave down to the bottom end of the channel.
Yields rose on Greek, Italian and Spanish debt over the weekend and the Euro dropped. Germany's top two finance officials rejected the use of the ECB to boost the size of the Eurozone rescue fund, going against the advice of US Treasury Secretary Tim Geithner. The EU has issued a stern warning to Greece that if it does not take further austerity measures, its next aid trance is in doubt.
Greek PM George Papandreou canceled his US visit that was supposed to begin today because of the dire situation in his homeland. Greece has 800 million Euros worth of coupon payments coming due on Tuesday, and over the next 7 days EU creditors will make the determination of whether budget measures will be enough to ultimately avoid default. It is very conceivable that this week could bring the "inevitable" Greek default, and the credit markets are certainly reflecting that.
So with a 2% drop this morning has the market priced in a possible Greek default? I think the simple answer would be 'No'. A Greek default would be catastrophic for the Eurozone, with countries like Italy and Spain already standing on hardly solid ground. A Greek default this week could trigger the domino effect so many European economists fear. From a trading perspective, it will be smart to be patient and deliberate in your decision making.
Most prudent active traders sold longs into last week's steep rally and are now in a flexible position. Support in the S&P is at 1188-1192. The 1172-1177 zone will be the crucial area for bulls to defend in order to keep this rally intact.
If the market does hold up and Greece avoids default, we could be in for some more 'squeezing'. Last week we saw a group of stocks show tremendous leadership, and that is where traders turn during an oversold bounce. Amazon.com (AMZN) has to be mentioned as the leader of that group. The stock held up well during the correction and then surged to all-time highs at the end of last week. Apple (AAPL) is another tech leader that behaved well last week, and looks buyable on any major dips.
Traders also continue to watch Netflix (NFLX), which got hammered last week after revealing a larger than expected number of cancellations following the separation of its streaming and DVD by mail service. CEO Reed Hastings sent a long email to subscribers this morning apologizing for how the situation played out, and announced the DVD by mail service would be separated into a new entity called Qwikster. It will be hard for NFLX to ever reclaim the lofty multiple it once held.
If you are a bull at heart, at least wait for issues with Greece to play out this week before jumping in. It feels like, despite last week's bounce, we have more downside to come. The bear flag pattern we highlighted two weeks ago is still intact, and forecasts a possible move down to the 1,000 area for the S&P.
*DISCLOSURE: Scott Redler has no positions
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