Stocks are rallying today because of:
1) Hype and hope of a Greek deal
2) China has stopped trading of 49% of stocks and threatened to arrest anyone who is short-selling the market (talk about a backstop!)
Regarding Greece, no deal has been made. Greek PM Tsipras has submitted a proposal for a new deal… which is almost EXACTLY the same as the deal that 61% of the Greek population rejected via referendum last week.
Tsipras has completely backed himself into a corner. He used up a lot of goodwill with EU officials when he let Greece to default by staging a referendum for Greek voters AFTER the due date on Greece’s debt.
The voters obviously voted “No” on the EU’s deal… so Tsipras had to come up with a new proposal. The only thing he can suggest that would possibly sit well with Greek voters is “debt forgiveness,” which Germany has stated it is absolutely opposed to.
So now Tsipras must decide… does take a bad deal, which will force a popular revolt in Greece (and likely his expulsion from office) or is he the man who takes Greece out of the Eurozone?
His finance minister has already quit his post… and doesn’t seem too upset about it. Perhaps Tsipras will follow suit, Greece will elect another PM and the whole charade can start all over again?
The Greek drama has engaged in “extend and pretend” for five years now. It’s highly likely that this will continue this time around with Greece accepting a bad deal and plunging further into economic collapse until the next debt problem emerges.
As for China…
Anyone who bothered to look at the actual data coming out of China (the unmassaged data, not the fictitious GDP numbers), knew the China economy was in collapse. It was only a matter of time before its stock bubble joined suit.
China, which we are told is moving towards free market capitalism, has thus far dealt with the crisis by halting 49% of stocks from trading and threatening to arrest (and likely “disappear” anyone caught short-selling stocks or somehow promoting market “instability”).
The market is bouncing on this… it’s now coming up against the first line of resistance (blue line) established by the uptrend from late 2014. If we break above that we could even bounce to retest the longer-term bubble bull market trendline (green line)
Crises never unfold in straight lines. Investors forget that when the Tech Bubble burst, stocks were a roller coaster with over 8 moves of 16% or greater in the span of six months.
China’s bubble was even larger than the Tech Bubble. The price volatility will be even more severe… but the bubble has definitively burst… and the market will be heading lower in the coming weeks.
In short… the two biggest reasons for the markets to be rallying today (Greece and China) are simply temporary issues. They will resolve, very likely for the worse, in the coming weeks. Smart investors should be using this bounce to prepare for the next wave of the Crisis.
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