Greece and the Stock Market

Three Thoughts on Greece and the Stock Market

Keep Your Eyes on the Prize

A Tight Stock Chart and Big Growth Numbers

Few things get the attention of investors like a good old international crisis—usually financial (though sometimes involving warfare). These big events have the potential to bring down a country’s financial system, and through a domino effect, bring down the U.S. economy, too. The events are often met with vicious selling even when the economy involved is relatively small.

This time around, the culprit is Greece, a country that has been teetering on the edge of default for nearly five years. The country’s recent troubles first surfaced in early 2011, and the threat to Europe’s economy did send the U.S. market into a short but very sharp decline in August of that year. Over the past weekend, we saw restructuring talks between Greece and the rest of the E.U. break down (though there has been a resumption of talks and some fighting words since then), causing a drop in stocks amid fears that Europe (and the rest of the world) would take a big economic hit if Greece left the E.U.

I’m not an economist, so I won’t comment on what Greece’s potential downfall could do to interest rates, economic growth, unemployment and the like. But I am a student of the market, and I have three thoughts to offer.

The first is something Tim Lutts says frequently: In the stock market, trouble usually comes from where you least expect it. It’s usually out-of-the-blue or overlooked events that disrupt the market. Greece, which has been in the news for a few years and in the headlines every week for the past few months, is less likely to cause the market to fall apart.

And that’s because the market is a discounting mechanism. It’s very likely that many big, smart, institutional investors have already factored Greece’s default (or “simple” exit from the E.U.) into their investment decisions. Heck, maybe that’s a reason the stock market hasn’t gone anywhere since Thanksgiving!

My second thought is that, throughout history, these big, headline-grabbing international events frequently occur near meaningful market lows. Sometimes there’s a sharp selloff on the news, but after that, the buyers take control.

Off the top of my head, the start of the first Iraq war in January 1991 kicked off a huge bull market. The collapse of the Asian Tiger currencies in October 1997 marked a low. The Russian ruble/Long-Term Capital Management collapse in 1998 came at the bottom. The terrorist attacks of 9/11 marked a multi-month low. The launch of the second Iraq war came at the start of the 2003 bull market. Bear Stearns’ bankruptcy in March 2008 preceded a 10-week rally. On the other hand, the bankruptcies of AIG and Lehman caused a crash and the market didn’t bottom for another six months or so.

My overall point isn’t that you should buy with both fists (see below); I have no idea if Greece will turn out to be the catalyst that pushes the market into a real correction. But, historically, these well-known, headline-grabbing events aren’t usually associated with the starts of major declines—in fact, they’re typically near the end of a decline, not the beginning of one.

My third idea is simply this: Keep your eyes on what counts—the action of the market and leading growth stocks. Forget the headlines, the predictions (of both the doomsayers and the permabulls), and even that feeling in your gut. Forget it all. Instead, place your trust in the system you follow.

The reason to keep your eyes glued to the market is that, sure, it’s possible a Greek default could cause a recession in the U.S. and elsewhere … but if that’s going to happen, the market will break down (my market timing indicators will give sell signals) and individual stocks will do the same, which will cause me to raise lots of cash. If the Greece situation isn’t the end of the world, then guess what? The market is likely to hold up well and stocks will follow suit.

Thus, I’m sticking with the trend of the overall market and individual growth stocks. Today, despite the volatility and major headlines, not much has changed with the market’s intermediate-term trend—it’s still neutral (sideways), while the longer-term trend is tilted up. I think my current stance makes sense—something between one-quarter and one-third in cash, and the rest invested in up-trending growth stocks with great stories and excellent sales and earnings growth.

Now, if you happen to be a growth investor and are 100% invested, by all means, cut back by pruning your weakest stock or two (and even take partial profits in a few winners). Conversely, if you’re extraordinarily defensive (say, 80% or 90% in cash), I think it’s fine to do a little buying of some resilient performers right here.

But if you’re in the neutral-but-leaning-bullish camp like me, there’s not much to do but honor your stops and take your cues from the action of the major indexes and individual stocks.

Well, actually, there is one more thing to do … but it doesn’t involve buying or selling. While everyone is focused on the headlines, now is the time to work on your shopping list. And on this front there is plenty of encouraging news—while the major indexes haven’t gone much of anywhere since Thanksgiving, I’m seeing more solid set-ups among growth stocks today than I have during the past six months.

Of course, set-ups don’t guarantee anything. But given the backdrop of an overall sideways market, the fact that so many growth stocks are in uptrends, or have etched proper launching pads, is a good sign.

One name I’ve been watching on and off for a few months is Norwegian Cruise Lines (NCLH), which is one of the “big 3” in the cruise industry. There’s a real growth story here thanks to a steady expansion in the firm’s ship count, along with an acquisition last year that gives it exposure to the high end of the market. Here’s what I wrote about NCLH in Cabot Top Ten Trader last month:

“Norwegian Cruise Lines describes itself as a “diversified cruise operator,” which seems accurate. The company spent a hair over $3 billion to purchase Prestige Cruises International, a deal that closed in November 2014. The company’s brands (Norwegian Cruise Line and Oceania Cruises and Regent Seven Seas Cruises—the two companies it got in the Prestige takeover) serve each segment of the modern cruise industry. Oceania serves the upper-premium segment with fine dining and service and destination-driven itineraries. Regent Seven Seas serves the luxury market with all-suite accommodations, round trip air fare and unlimited shore visits. Norwegian is also a pioneer in Freestyle Cruising, which offers guests the newest ships and more freedom and flexibility. The resurgence of the cruising industry as a whole reflects the improving economy and aging of Baby Boomers into the cruise lifestyle. The result has been a rising rate of revenue growth, from 3% in 2012 to 13% in 2013 to 22% in 2014. The latest batch of good news arrived last Thursday (May 7), when the company announced Q1 quarterly results that beat expectations on earnings by a healthy margin and showed 41% revenue growth. While revenues were cut a little by currency exchange fluctuations, investors were clearly pleased by the overall numbers. Norwegian has 21 ships offering more than 40,000 berths and expects to float five new ships by the end of 2019.”

What intrigues me is that Norwegian had a good-sized share offering (20 million shares) on May 20 by some funds that had invested in the firm back when it was private (NCLH came public in January 2013). There was no dilution to the stock; only closely held shares were sold.

That offering (along with a temporary grounding of one of its ships off Bermuda) caused the stock to drop from 57.5 (a new high) to 55 on May 20. But since then, NCLH has traded extremely tightly between 54 and 56. To me, that smells like big investors are accumulating shares, absorbing the offering in fine fashion. Add that price action to the bullish fundamentals (analysts see earnings up 27% this year and another 33% in 2016), and I see good potential.

You could nibble here, though I’m more interested in buying shares on a strong push above 56 in the days or weeks ahead, and then using a tight stop in the 51-52 zone to keep risk in check.


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