Over the last few weeks it seemed like Greece was holding the upper hand in a defiant standoff with eurozone leaders for a better bailout deal more to the liking of the country's anti-austerity Prime Minister Alexis Tsipras and his Syriza party supporters. Mr. Tsipras may have thought that last week's referendum vote by the Greek people to reject the austerity terms of the eurozone proposed bailout would be giving him some leverage to negotiate a deal with fewer austerity measures for his country. He was likely betting that European leaders would accommodate some of his proposals rather than risk a Greek exit from the eurozone which could potentially destabilize the euro and the European Union. It is now looking like Mr. Tsipras is losing that bet. At the end of a long weekend summit meeting, all 19 euro members were pushing Greece to implement all austerity measures and broader economic overhauls that its voters rejected just one week ago. The tables have turned on Mr. Tsipras as eurozone's finance ministers are now betting that Greece will conform to austerity rather than face financial ruin and more hardship for its people. The EU may have won that bet today as Greece seems to have capitulated to austerity measures with both parties agreeing to a new third bailout deal. Greece must now pass legislation on a series of reforms by Wednesday in order to qualify for the bailout. Many Greek people are upset that their prime minister seems to have caved in to the harsh demands of the EU, and several analysts are calling the terms of the new bailout severely humiliating to Greece and its people. Indeed, it seems like the new bailout terms are tougher and more severe than those offered before last week's referendum vote and likely contain elements of punishment as well as fiscal responsibility. Today many analysts were saying that a "Grexit" or Greek exit from the eurozone has been averted. The new bailout, however, has to be approved by Greek lawmakers on Wednesday. If they reject it, a "Grexit" could still be in the cards.
The broad stock market rallied strongly today (217 points) on news of the new bailout deal. In my blog last Monday (July 6) I wrote:
"The next four weeks could be extremely volatile for all financial markets as it contains several strong reversal zones. We could see markets making more than one strong change in direction. Within this time period we could see a bottom to the current medium-term cycle in the broad stock market, which we will probably look to buy. But how low will the markets fall before hitting that bottom? That is hard to say as the cycle structure is still a bit ambiguous, but we could see the DOW down to 17,000 (and possibly lower). This is why we have a short position in the market now. The current mess in Greece and Europe is (for now) suggesting such a plunge. We need to keep in mind, however, that any positive news on Greece's debt crisis could quickly send equity markets up, and that could happen anytime over the next four weeks. There is currently support for the DOW in the 17,550 - 17,600 range..."
Well, the DOW got down to 17,465 on July 7 but then seemed to find support just above 17,500. Fueled by the positive news on Greece, it is now rapidly approaching 18,000. This suggests that July 7 could be the bottom of a medium-term cycle and we are now starting a new one. If so, the DOW, S&P 500 and NASDAQ could rally strongly and test their all-time highs very quickly. The possibility of this scenario (and the breach of my stop loss at 17,800) forced me to cover my short position in the broad stock market today. Markets may back down a bit after today's strong rally and could be quiet tomorrow as they wait to see if Greece will accept the EU's new bailout terms on Wednesday. If Greece accepts the bailout, markets could rally strongly towards their all-time highs, but if Greece rejects austerity (again), markets could plummet, and we would be back to the idea of an old cycle still bottoming (possibly in the 17,000 area by the end of the month). All of these possibilities are a bit confusing, I know, but now that we are out of the market, our trading strategy will be fairly straightforward. It is too late to buy the bottom of a new cycle (assuming it started on July 7) so we will attempt to sell short again at the top of any strong rally approaching new all-time highs, especially in the last two weeks of this month (and especially if we see intermarket bearish divergence where one or two of the three major indices - DOW, S&P 500, NASDAQ - make(s) a new high, but not all three). There is a good chance that such a top would be followed by a severe correction (possibly 10% - 15% or greater). This is my preferred scenario for now. On the sidelines of the broad stock market.