European leaders are today encouraging the people of Greece to vote "yes" later this week in a referendum to approve their country's bailout on eurozone terms to avoid a Greek exit from the euro. Greece's prime minister Alexis Tsipras, however, continues to urge a "no" vote in an attempt to gain more leverage to negotiate a deal more favorable to his anti-austerity party. That vote is scheduled for the 5th of July. Mr. Tsipras also stated today that Greece would miss its loan payment to the International Monetary Fund due on Tuesday. Does this mean that Greece will default and leave the eurozone? Well, maybe, but not necessarily. Greece's decision to have a referendum vote has cast the country into uncharted waters. Even if Greece defaults, the European Central Bank and the International Monetary Fund will have to decide how to proceed under these unusual circumstances, and major money moves could be delayed for at least a week. This would give the Greek people enough time to vote and either accept or reject the current terms of their country's creditors. If Greece does default, it is even possible for the country to apply immediately for another bailout; however, a likely requirement for these new funds would be Greece's total acceptance of its creditors terms (i.e. no negotiations and no anti-austerity proposals).
This is not a good situation for global equity markets. Remember that the crash of 2008-2009 was triggered by failing banks. We are now looking at the failing economies of entire countries. Greece's economic collapse could soon be followed by the breakdown of other weak economies in Europe such as Spain and Italy. Some financial analysts are now referring to the current overbought broad stock market as a "bubble looking for a pin". Could the debt crisis in Greece be the pin that pops the bubble? Anything is possible, but no player in this "Greek tragedy" wants to see Greece leave the eurozone, so some sort of resolution may come about over the next week or two to keep Greece's economy in the EU.
The big question for traders and investors now is whether or not financial markets can handle the stress of this economic uncertainty in Europe. The DOW plunged 350 points today, but more significantly, it closed below 17,700. In last Thursday's blog I wrote: " ...If the DOW does break below that (17,700) level, it means the old cycle is not over yet and the market could continue down for several more weeks, possibly bottoming in mid-July. The Greek debt crisis may be the factor that will resolve this current ambiguity in cycle labeling. If the crisis is resolved, stock markets could soar and would likely make new highs. A Greek default and exit from the eurozone, however, could sink the DOW below that 17,700 mark." The DOW closed the day at 17,596 so it looks like we have an older cycle that could bottom in mid to late July. If this bottom goes below 17,000, the broad stock market could turn very bearish. Today's plunge triggered bearish momentum signals in the DOW, S&P 500 and NASDAQ making these indices now mixed bullish and bearish. (They had been 100% bullish). We may see an opportunity to sell this market short over the next several days, but for now we are out of the broad stock market. (We sold our long positions earlier today - see below).