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Key actors to take stake in Greek drama in the week ahead

Greece's debt crisis may finally come to a head in the coming week, testing markets that have been relatively complacent about the potential for collateral damage.

"There are two things. One is what's going to happen in Greece, which nobody knows for sure, and the second thing is are we going to go back to a period where good news is bad news, where people think strong growth is going to lead to a stronger reaction from the Fed and higher interest rates," said Ed Keon, portfolio manager at Quantitative Management Associates.

Read MoreEuro slips on Greek debt fears, dollar gains

There are several important U.S. economic reports including Monday's existing home sales; Tuesday's durable goods; Wednesday's final look at first-quarter GDP; and Thursday's personal income and spending. Keon said the reports that will be the most important are the ones that would show whether wages are picking up, since the Fed has been waiting to see an improvement in inflation and that could influence the timing on rate hikes.

Greek Prime Minister Alexis Tsipras speaks with Greek expatriates during a wreath-laying ceremony in St. Petersburg, Russia, June 19, 2015.
Maxim Shemetov | Reuters
Greek Prime Minister Alexis Tsipras speaks with Greek expatriates during a wreath-laying ceremony in St. Petersburg, Russia, June 19, 2015.

Stocks rallied in the past week after the Fed appeared dovish when it said it did not see strong enough data yet to raise interest rates from zero, but it did suggest that there could be one or more hikes this year once the economy improves.

However, the rally faded and stocks sold off Friday as traders positioned for the uncertainties surrounding the meetings of euro zone finance ministers and officials, set for Monday. There were also concerns that Greece, after securing emergency funding from the European Central Bank, would still see a run on its banks.

Robert Sinche, chief global strategist at Amherst Pierpont, believes the odds of a default have increased dramatically, and markets will react negatively.

"My guess is there will be dislocations, but I don't think this is a crisis situation. I wouldn't want to own any Greek banks because there will be capital flight and capital controls, and Greek banks will get trashed. ... It's become very disorderly in Greece but it's not clear it gets very disorderly elsewhere in the world," said Sinche. "We know where this is headed. We just don't know when."

The ECB on Friday reportedly raised the emergency funding cap for Greek banks by 1.8 billion euros ($2 billion). Reuters reported that 4.2 billion euros were withdrawn from Greek banks in the past week.

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"What happens to the market hinges on Greece, and we're not going to get any good news," said Milton Ezrati, market strategist and economist at Lord Abbett. "There's going to be a lot of fits and starts, but we're not going to know until the 30th ... they have to pay the debt on the 30th and both sides will go to the wire. We're going to have the same on and off again."

Greece has to make a payment of 1.5 billion euros to the IMF by June 30, a deadline the organization has said is firm.

Sinche said it is likely Greece will default. "They have to restructure. Restructuring debt is default," he said. "Now it's basically the ECB and EU governments that are on the hook for most of this debt. The question is have they had enough."

Euro zone leaders meet after finance ministers Monday, and despite assurances from Greek Prime Minister Alexis Tsipras that Greece would get a deal with creditors, there was no sign of progress ahead of the summit. "(German Chancellor Angela) Merkel has been the one who has let the this thing go on, but I'm not sure she'll let this go on any further," said Sinche.

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Keon, on the other hand does not expect a default though the odds have increased, and he says like other investors, he's relatively complacent about the outcome. "I think the pressure right now is going to be more on European markets than the U.S. market. The U.S. market could kind of stall out here, and a real deterioration of Greece would probably result in a drop in risky assets worldwide," he said. "The reason you're seeing a rally in Treasurys is if global uncertainty increases then U.S. Treasury bonds will be the biggest beneficiaries."

Treasury yields ended the week near their lows. The 10-year was at 2.26 percent late Friday, while the two-year was at 0.60 percent.

Stocks sold off Friday, ending near their lows of the day, as a quadruple witching expiration of options and futures added to volatility. But for the week they were positive, with the Dow up 0.6 percent at 18,015, and the S&P up 0.7 percent at 2,109. The Nasdaq broke through its 15-year high, and while weaker Friday, it finished the week with a gain of 1.3 percent at 5,117. The Russell 2000 was the best performer at 1,284, a gain of 1.5 percent

Whither stocks

According to Stock Trader's Almanac Editor-in-Chief Jeff Hirsch, the Dow has been down 22 of the last 25 years in the week after June expiration Friday, for an average loss of 1.1 percent.

The S&P 500, meanwhile, has been higher only once in that week since 2003, but the Nasdaq outperforms, and it has been up 50 percent of the time since 2003, according to Stock Trader's Almanac.

Ari Wald, technical strategist at Oppenheimer Asset Management, said the breakout by the Nasdaq this week and the Russell 2000 are a good sign for stocks. "This is not what a market top looks like. Probably most important to me is the small-cap breakout," he said. "There's a study we've done that forward moves by the S&P 500 are above average when you get breakout moves, ... Without the signs of a market top, we think this uptrend continues."

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Some other strategists expect a pullback this summer, and volatility around Greece events. Keon said he does not look for a correction but one could come at any time. He did say he is more cautious on stocks than he has been for the past several years.

Keon said valuations are higher than historic averages, earnings growth for the S&P 500 has fallen off and there will be pressures on profits from the stronger dollar and higher wages. "I would be surprised to see slower progress on the market over the next year. If we could get 6 or 7 percent I would be happy with that," he said.

Wald said he doesn't expect a pullback, but some sectors could sell off. "It could grind higher. We can still get this kind of choppy behavior, but it's a kind of choppy behavior that moves higher," he said.

Read MoreFears over Greece mount as talks collapse

The Fed is still expected to begin raising rates as soon as September, and some strategists say the market could start to react to higher rates.

"The typical Fed playbook is you'll get some very strong performance into the rate hike, and then some volatility into the onset of the rate hike," Wald said.

He said Greece has become far less of an influence on stocks than it had been previously. "We have seen down days with Greece in the headlines, but those days have been a good day to buy stocks," Wald said.

What to watch

Monday

10:00 am: Existing home sales

Tuesday

8:30 am: Fed Gov. Jerome Powell on economy and monetary policy

8:30 am: Durable goods

9:00 am: FHFA HPI

9:45 am: Manufacturing PMI

10:00 am: New home sales

1:00 pm: Two-year auction

Wednesday

8:30 am: Real Q1 GDP (3rd)

1:00 pm: Five-year auction

Thursday

8:00 am: Fed Gov. Daniel Tarullo on economy and financial regulation

8:30 am: Initial claims

8:30 am: Personal income/spending

9:45 am: Services PMI

9:45 am: Fed Gov. Jerome Powell on payment system

1:00 pm: 7-year note auction

Friday

10:00 am: Consumer sentiment

12:45 pm: Kansas City Fed President Esther George on the payments system