Traders fear Greece and are watching Yellen

Some traders are already bracing for a violent Monday, but first they will get through Friday, listening to Fed Chair Janet Yellen for any guidance on whether international risks are serious enough to keep the central bank from raising rates this year.

Greece's debt drama is the most pressing international risk, and it will play out over the weekend, with its parliament voting Friday on the proposed economic overhaul that is being presented to Greece's creditors. The vote would authorize Prime Minister Alexis Tsipras to negotiate with creditors, and the 28 heads of the European union will then meet Sunday.

"The Greeks have confounded conventional wisdom in every single iteration, including the referendum vote. It is absolutely a waiting game, and we'll see what the world looks like on Monday," said Julian Emanuel, UBS equity and derivatives strategist.

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Emanuel said the market could move dramatically in either direction, depending on the outcome of the Sunday meeting. "It could be up massively. We have said from day one that July was going to be volatile and violent in both directions. You could have a high-low range for the month of July in excess of 10 percent, depending on how events unfold," he said.

Yellen speaks Friday at 12:30 p.m. ET in Cleveland on the economic outlook, and she will also take questions. The Fed, in the minutes from its June meeting, noted that it was watching the events in Greece and was concerned about China's economy.

While many economists expect the Fed to raise interest rates for the first time in September, the market has been pushing back its expectations. Traders have been placing bets in the futures market that one or both events would be serious enough to keep the U.S. central bank from raising interest rates until early next year.

But Emanuel doesn't expect Yellen to say anything that would be market moving. "It's Friday, and she doesn't want to be too exciting. They don't know any more than any of us do about Greece, and that's why we think there's extraordinary opportunity for volatility," Emanuel said. "That's why we structured our portfolio so that you are a buyer instead of cutting your risk with five to 10 percent corrections."

He said a correction is possible, but that the second-quarter earnings season could also provide some upside because Wall Street estimates are once more too low.

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"We're still thinking if you have adverse developments, either a formal Greek exit from the euro or a result that shows a Greek exit is all but inevitable, we think that type of dislocation in U.S. equities will end up being a buying opportunity," Emanuel said.

Nomura rates strategist George Goncalves recommended Thursday that bond investors consider "risk-off" hedges based on the uncertainty surrounding Greece and China. Goncalves said he sent out a quick note because it appears the markets are too complacent about the outcome for Greece.

"Maybe I'm being too cynical. But being cynical has worked," Goncalves said.

Art Cashin, director of floor operations at the New York Stock Exchange for UBS, said a lot of traders are expecting a volatile swing Monday. "You're going to have a vote in the Greek parliament. There's still things going on. You have to wait and see what happens and how China's behaving," he said.

"A lot of people think Monday's a roll of the dice, but I think they don't have to do anything about it until tomorrow," he said.

In the options market, some investors were already actively positioning for a big move after the weekend, according to Patrick Kernan who trades S&P 500 options for Cardinal Capital at the CBOE.

"A guy just came in who's certainly making a bet on us having a violent move," said Kernan, noting the options expire next week. "We're seeing more of that protection buying. There's a lot of trading short-dated options. People are putting one week, two week bets on because they think we could have some drastic move over the weekend."

Stocks closed slightly higher Thursday, erasing some of the biggest gains made in an early morning rally sparked by a recovery in Chinese stocks. The Dow was up 33 at 17,548.

Chinese regulators imposed new restrictions on selling by major holders and other measures that sent stocks on mainland exchanges sharply higher Thursday. Shanghai's nearly 6 percent gain was its best day in six years.

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European shares were also higher on optimism that there would be a positive outcome for Greece.

Besides Yellen, there is wholesale trade data Friday at 10 a.m. ET., and Boston Fed President Eric Rosengren speaks at 11:35 a.m.

"Yellen's the main event," said Chris Rupkey, chief financial economist at Bank of Tokyo-Mitsubishi. Rupkey said like former Fed Chair Ben Bernanke, Yellen visits Federal Reserve districts headed by hawkish presidents, in this case Cleveland Fed President Loretta Mester.

"The queen of the doves is visiting the hawkish president's haunts. ... It could be interesting. Whenever they put economic outlook, that's a fairly major speech," said Rupkey. "It could go the dovish way, and she'll say we're not there yet (for a rate hike) ... and then it could go the other way."

Rupkey said Fed Gov. Jerome Powell and New York Fed President William Dudley both made comments similar to Yellen recently, suggesting that the Fed could raise rates in September.

"This is her first speech since the labor market improved. It will be interesting to see if she points to improvement," Rupkey said referring to the decline in the unemployment rate to 5.3 percent in June.

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"It's tricky because the economists have not moved (expectations) out like the market has," he said. Fed funds futures are pricing in a first rate hike in January, and have put low odds on September. Odds for September had been more than 50 percent just several weeks ago.

"The thing about Yellen is if they're going in September, and you think back to the other heads of the Federal Reserve, they kind of suggested they might be closer to going a meeting ahead. If they were going to go in September, they might talk more about it. It would be interesting if she raises the curtain a little," he said. Yellen also testifies before Congress twice next week.

Rupkey said Yellen may treat the U.S. as insulated from global risks in her remarks, and not play up China or Greece as much as traders expect.

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