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Are You Ready for a Euro Surprise?

By all appearances, the eurozone is cracking, coming apart at the seams…

It’s no secret that Greece has gone from bad to worse. And now Spain is worsening, too. Spanish banks are the latest casualty of the massive debt and spending binge that ended in 2008.

This crisis isn’t dissimilar to what happened in the United States. But while the United States can be commended for tackling the problem head-on, the same can’t be said for Europe.

Unlike the United States, the eurozone faces the issue of sovereignty, which has been a deal breaker on more than one occasion. Seventeen distinct cultures, each with their own agenda, make consensus a miracle every time it happens.

So it’s understandable that the world’s preparing for the worst – a Greek default, a Spanish bailout, or both.

Nevertheless, you shouldn’t lose sight of the possibility that neither will occur.

In fact, there’s evidence that the crowds are in for a surprise…

Resiliency in the Eurozone Worth a Safe, Contrarian Bet

We say it again and again here at Wall Street Daily: The crowd is rarely right.

And here, as everywhere, there’s a good reason for it.

There’s a lot of one-way betting being placed on the eurozone, as everyone’s either heading for the doors or has already left the building.

And now the gates are flung wide open for a surprise that could send the markets heading in the opposite direction.

I have an excellent reason to expect that it’s going to happen, too.

You see, there’s a reliable indicator – the VIX (or Volatility Index) – that’s clearly defying the “wisdom” of the crowds.

Given the possibility of a major hit to the eurozone upon a Greek default, the VIX should be anticipating a worst-case scenario and a potential 2008 type scenario for financial markets. It should be trading in the 30s or even the 40s.

Only, it’s not. In fact, it’s trading as if the eurozone crisis isn’t as volatile as everyone assumes and that the crisis may be resolved.

The current VIX level (holding steady in the mid-20s) gives me hope that a trade betting the opposite way – a bullish call on the S&P – might actually be the way to go.

It’s a contrarian bet for sure, but there’s a way to take this chance and put very little at stake. And that’s buying short-term call options on the S&P that expire at the end of June.

I rarely recommend a short-term option. But in this case, there’s a major event – the Greek elections – taking place on June 17. And the results could set the stage for a massive rally, regardless of whether or not Greece exits the eurozone.

In either case, there are good arguments for a rally.

If Greece exits, the drama will be over and the markets will gain some footing as the uncertainty surrounding the decision will be over.

Also recall that Greece is a non-contributing member, so an exit might actually strengthen the eurozone rather than weaken it.

On the other hand, if the Greeks vote to stay, then the eurozone will have set a precedent that it can and will keep the union intact. And that it’s willing to inflate its currency to assure investors that investing in the euro is a safe bet.

It will also provide a conclusion that should please the markets, setting a framework for working out the issues surrounding Spain, Portugal and Italy.

Bottom line: While the general sentiment is decidedly negative and investors are fleeing stocks worldwide, that little followed indicator – the VIX – is saying that things may surprise to the upside before the summer is over.

It might be worth listening to that indicator and placing a small bet that the crowd is wrong… again.

Ahead of the tape,

Karim Rahemtulla