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Traders buy the rumors of Greece, merger deals. Will they sell the news?

Michael Santoli
Michael Santoli

On both sides of the Atlantic, they’re buying the rumor. We’ll have to wait to see what traders do with the deal news if it comes.

European stocks were rallying hard as leaders prepared to gather for deadline negotiations over a financial support package for Greece. The opposing sides were tentatively reported to have moved closer to some sort of agreement with fresh proposals.

Yet the anticipatory stock rally also has the look of the kids throwing an anniversary party for their warring parents, hoping that the celebration shames or inspires them to call off the divorce.

This is the sort of trading action – a gap higher on stirrings of hoped-for news - that needs to prove out beyond a quick reflex bounce in order to be trusted.

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It makes some sense for European stocks to firm up as the probability of a deal rises. The EuroStoxx 600 (^STOXX) index fell more than 7% in two months as the exhausting and contentious Greek talks dragged on.

Yet there were few broader signs of acute panic in global capital markets heading into the weekend, so it’s not a given that clearing the fog of the Greek standoff alone will drive a forceful and lasting surge in asset prices.

In the U.S., it’s a different set of rumors and reports about ambivalent unions that has stock buyers excited.

Hostile takeover maneuvers are all over the screens as a new week begins. The long-percolating consolidation of the health-insurance giants is coming to a boil. Cigna Corp. (CI) rejected an offer from Anthem Inc. (ANTM) at a price 12% above Cigna’s Friday closing level. Aetna Inc. (AET) has made an approach to Humana Inc. (HUM), and UnitedHealth Group (UNH) is said to have reached out to Aetna about a merger.

Meantime in the energy patch, Williams Cos. (WMB) said it rebuffed an uninvited offer and is now weighing its strategic options.

On Friday I said “One can never guarantee a ‘merger Monday,’ but the idea that the deal pipeline is packed remains foremost in investor minds and is keeping many from getting too bearish.” In retrospect maybe I should have guaranteed it.

This burst of activity is about a bull market acting like a real bull market, if belatedly. Why now?

The drawn-out economic recovery has finally generated confidence in boardrooms, even as CEOs grasp for the next driver of profits, as organic growth remains scarce.

Debt is cheap – but it’s unclear for long this will be the case, so there is urgency to act. In industries such as healthcare, media, energy and retail, structural or regulatory shifts are leading companies to seek scale to weather changes better or exploit the results.

So long as the financial markets stay reasonably steady, M&A activity should keep gathering momentum. Deals reorder the priorities and enliven the emotions of other, related companies, begetting more deals.

Again, this is never reason enough to bet on stocks to run away to the upside. And it should be noted – as many tactical market watchers are noting today – that this particular stretch of late June after options expirations has tended to have a downside bias before seasonal factors turn positive in early July.

The almanac adherents have had a rough go of it lately, but take these tendencies for what they’re worth.

Last week ended with the fifth straight down Friday.  But it was hardly a washout, and over the course of the week health gauges such as small-cap stocks checked out OK. We’re back in he upper reaches of the trading range that has contained the indexes and exasperated bulls and bears alike. Maybe the real and imagined news this morning will offer a good excuse to break out of the pattern.

But, as always, the way stocks react to the now-expected positive deal news in a day or a week is far more crucial than how they’ve responded to the fresh rumor.