How to play the Greek crisis

In so many ways, the markets need a catalyst to shed light to the overvalued status of the US stock market.

The Rockledge Group has been cautious on valuations since we launched the L2 Portfolio on the Covestor platform two years ago.

While we are watching the Greek showdown carefully, we don’t believe that this is the catalyst that will have long-term repercussions on the markets here at home.

Media Gloom

Financial media outlets are abuzz with doom and gloom.

Greece’s economy is on the brink of collapse after capital controls imposed ahead of a July 5th referendum regarding a workout deal with the country’s creditors.

However, if we can recall, we have been down this road before.

It’s not like this Greek issue just came to light. Countries, banks, traders, advisers and portfolio managers have had months to assess and determine their exposures to Greece.

That said, the recent impasse in Greece was followed by a fall in the Greek stock market.

The Global X FTSE Greece 20 ETF (GREK) fell -19.4% on June 29. However, the more broad euro stock markets were not hit as hard.

The largest holdings in our SPDR Select Sector funds focused on healthcare (XLV), technology (XLK) and consumer staples (XLP). Each lost  -2.4%, -2.1% and -1.5%, respectively, on June 29.

Broader Market

Against the -2.1% loss in the S&P, this result is not bad.

Across all of the sectors, the moves were all negative, and were all in the -2.1 to -2.4% range.

Utilities fell just 0.9%, but are such a small weighting in the index, that it doesn’t have a meaningful impact. Furthermore, the returns of utility stocks tend to be uncorrelated to the overall stock markets.

It is this correlation that is so recognizable right now. Correlation has been high, on a historical level, but has actually been falling over the past few months.

Flight to Safety

When there is a panic, investors tend to buy US Treasuries. The iShares 7-10 year Treasury (IEF) ETF gained 1.2% on June 29th, a large move.

Investors in the Powershares Ultra VIX ETF (UVXY) saw an $11 move, or 34% gain, that same day.

In my opinion, there is a 50-50 chance that a) the ECB will throw Greece out of the Eurozone or b) the ECB and Greece negotiate an 11th hour deal.

In one case, markets fall again; in the other, they recoup their losses. Given this, we believe it best to sit tight and wait.

Photo Credit: Dennis Jarvis via Flickr Creative Commons

The investments discussed are held in client accounts as of July 2, 2015. These investments may or may not be currently held in client accounts. The reader should not assume that any investments identified were or will be profitable or that any investment recommendations or investment decisions we make in the future will be profitable.


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