The lackluster market fighting to get over critical resistance the first three days of the week was hit by a knee-jerk reaction to the new Brexit survey. The most recent survey showed 55% of voters would like to leave the EU while only 45% wanted to stay. This 10% spread was the biggest ever in favor of leaving with only a little more than a week left before the vote. The major indexes all gapped lower on Friday and there was little in the way of recovery at the close.
The S&P dipped to 2,089 and rebounded only slightly to close at 2,096. The Dow gave up its fight at 18,000 and declined -172 points intraday. The index regained 50 points to close down -119. The Nasdaq was the biggest loser of the big three with a -1.3% decline thanks to the fall in the biotech sector.
After a 16% rally ahead of the ASCO meeting last weekend the Biotech Index fell -2.5% on Thursday and -2.4% on Friday as traders bailed on the stocks they had hoped would see big gains. The likely support target on the $BTK is around 3,000 with a potential drop to 2,900.
The Dow Transports ($TRAN) fell sharply with a -1.5% decline after nearing the 8,000 level on Wednesday. The big drop was driven by declines in trucking companies on weaker economics. However, railroads were down slightly as falling oil prices dampened expectations for a pickup in the energy sector. The 7,600 level is the next support that has held 2 of the last 3 times it was tested.
The financial sector was crushed over the last four days on expectations the Fed will delay hiking rates. The financials were a major reason for the market decline with Goldman Sachs the biggest loser on the Dow.
The energy sector declined about 4.5% from the Wednesday high when oil prices closed over $51. The failure in the XLE came exactly at strong resistance at $70. Many analysts believe the price of oil will remain in the $45-$55 range and that means energy equities will likely remain trapped near their current highs as well. Production outages are ending and the U.S. production rose for the first time in 13 weeks.
The NYSE Composite Index made a seven-month high at 10,638 on Wednesday and that was exactly resistance dating back to last July. The likely support on a protracted decline would be in the 10,000 range. The NYSE is made up of the smallest to the largest stocks in all sectors so it is representative of the broader market. It is not yet showing a break in the recent uptrend until it falls below the May low at 10,120.
The Russell 2000 Small Cap index exploded through resistance at 1,161 but then fell back to use that prior resistance as support on Friday. However, the RSI peaked at 71 on Wednesday and a level not seen since July 2013. The typical high dating back to 2013 has been around 69. This suggests the Russell was overbought but the MACD has now completed rolling over.
The S&P-400 Midcap Index hit a high at 1,526 on Wednesday and only 23 points from a historic high. The peak on the left side of the chart is the historic high from last June at 1,549. The midcaps have been the strongest index and they were fueled by biotechs, energy and banking. All those sectors were weak on Friday resulting in a -1.4% decline in the S&P-400.
The Nasdaq 100 big cap index ($NDX) rebounded off the 50% retracement support in May but is suffering from buyer fatigue in June. Many of the big cap stocks like Priceline, Google, etc, were weak. We will look for that 4,315 level to hold on any further decline.
High yield bonds continued to advance as Fed rate hike expectations declined. The red line (HYG) is moving ever closer to the black line (SPX) and the HYG normally leads. If the HYG breaks out to a new high the S&P should follow.
The Semiconductor Index always leads the S&P at major turning points. However, the SOX turned slightly lower last week and the S&P followed suit. Like the HYG we need the SOX to continue to a new high in order to drag the S&P and Nasdaq higher.
The similar chart of the dollar and oil prices shows the falling dollar lifting oil prices. This would also lift equities if it were to continue. Without a firm statement from the Fed on Wednesday suggesting a July hike the dollar should continue to decline.
The short-term view is neutral. We are now into June and approaching the summer doldrums where volume is very light and volatility can increase. With funds flowing out of the market the prior 8 weeks it suggests a lot of investors are choosing to wait safely on the sidelines until the summer is over. The FOMC announcement and the Brexit vote are the two biggest hurdles left for the market to cross.
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