Investors who counted on an orderly resolution to the Greek debt crisis appear to have gotten what they wanted. But the question now is: What happens next?
A negative outcome has been far from the market's collective mind since stocks began rallying in October. Massive liquidity promises from European policy makers have stoked belief that a worst-case scenario — where Greek defaults, the European Union dissolves and the global economy reels — has been all but taken off the table.
But in pricing all that optimism, investors may have taken the market to the point where good news no longer matters.
That possibility came into view Thursday when Greek leaders agreed to the austerity measurestied to the next installment of its aid package.
European stock markets initially rallied but then cooled, while the news barely moved the needle in U.S. stocks.
"There's nothing really to be gained for the U.S. stock market as a result of the agreement," says Andrew Wilkinson, chief economic strategist at Miller Tabak in New York. "It just removes further impediments and reduces the overall risk emanating from the eurozone."
It didn't help that few market pros bought the notion that the latest proposal would be a lasting fit. German officials later intoned that the conditions did not appear to meet aid conditions.
More broadly, though, American investors appear to have moved past Europe and are ready to focus back on issues closer to home, specifically the nascent economic recovery and the future direction of the Federal Reserve.
"I don't necessarily think an acceleration for the S&P 500 goes hand-in-hand with a deal from Greece," Wilkinson says. The market "needs further support from economic data or it needs a deeper sense that the Fed's going to act regardless of the data."
The dynamic of waiting for Greece to resolve and anticipating when and if the Fed will roll out a third round of asset purchases known as quantitative easing sets up an investor dilemma. The central bank last week said it will keep lending rates near zero and hinted that QE3 was on the horizon.
Some in the market already are preparing for another round of uncertainty by implementing more stringent safety strategies.
"Unless the situation in Europe unwinds in a way that's not one of the scenarios already in the market — and the market has quite a few scenarios discounted — being heavily diversified with a barbell strategy has helped clients," says Quincy Krosby, chief market strategist at Prudential Annuities in Newark, N.J.
The strategy involves concentrating in annuities and defensive stocks like staples, utilities and health care — which, notably, have performed poorest this year — and a lesser allocation toward riskier strategies like options.
Krosby believes the approach is useful at times of uncertainty and particularly when the stock market is in a rally that is showing signs of tiring.
"Trying to connect the dots is hard when you have the head of your central bank coming out and saying we're going to keep rates low until the end of 2014," she says.
As for options, using them indeed involves substantial risk and isn't for the inexperienced.
But with the market's main gauge of fear, the CBOE Volatility Index around its lowest level in seven months, downside protection is fairly cheap.
"You can buy puts cheaply, you can buy calls cheaply," Rick Bensignor, chief market strategist at Merlin Securities in New York, says of options that respectively allow holders to sell or buy stocks at a certain level. "That's a strategy to look at if you think the market has a chance of not sitting here. Volatility is cheap enough that options may be a better way to play than stocks."
Options volume has been on an uptick in the early stages of 2012, averaging about 17 million contracts a day, according to the Options Clearing Corp. Volume had slowed in November and December but was near 19 million contracts a day in October.
In this climate, traders would be smart to sell calls on high-quality companies whose stock you also own, says Brian Stutland, head of Stutland Volatility Group in Chicago. The strategy provides income from selling the put contract, which gives the holder the option of buying a stock at a specified price and date, while also allowing for appreciation of the stock.
"You can lower the breakeven," he said, referring to price point at the stock where the owner would make a profit. "You're almost creating a synthetic dividend payment for yourself."
Another strategy for those not looking for big market moves is selling calls that are slightly out of the money — or below the current price — to increase chances of a payoff in a market that doesn't change much.
Michael Cohn, chief market strategist at Global Arena Investment Management, employs a twist on the approach — he's actually buying slightly out-of-the-money calls on an exchange-traded fund that pays when the stock market falls.
The premium for the calls is relatively inexpensive and it allows Cohn exposure should the rally exhaust itself and the market move lower.
"Whenever everyone is worried about something that everyone knows about, it doesn't happen," he says. "It's the stuff you don't know about. That's what comes back to bite you."