Introduction

A poll released over the weekend shows leave/not leave Brexit sentiment equal at 44%, and the market rises. Although the poll did not show a definitive No-Vote it did do a lot to alleviate Brexit fears and that had an affect that coursed through the global markets. Another poll, released after the market close today, shows no-vote sentiment rising to 53%.

Asian indices gained between 1.6% (China) and 2.3% (Japan) as risk-on investors returned to the market. European indices gained more than 3% across the board. The referendum will be held Thursday, polls closing locally at 8PM New York time with an estimated 50% of results expected in by 11PM. We'll know for sure what happens on Friday morning.

Market Statistics

Futures trading was positive right from the start, and strong. The major indices were indicated to open with gains greater than 1% and with little to know market news in the early hours this held into the opening bell. After the open the indices shot higher and hit the intraday peak just after 10AM. The SPX made an intraday high of 1.4%, hitting the 2,100 level, before moderating gains into the close. From 10AM until the close of trading the indices drifted lower off their highs, giving up most of the days gains in the last half hour of trading, but remained positive for the day.

Economic Calendar

The Economy

There was no official economic data today, and none due out tomorrow either, and very little due out this week. Wednesday we'll get Existing Home Sales and Housing Price Index, Thursday is weekly jobless claims and New Home Sales, Friday Durable Goods and Michigan Sentiment are on the schedule.

Moody's Survey Of Business Confidence fell -1.9% to hit a new multi-year low of 25.6. Mr. Zandi still says that US business are the most confident with responses indicative of an economy expanding above its potential. Globally sentiment is much weaker, the weakest in South America where political turmoil is still running rampant. There is no mention of the Brexit although I can't help but think it has something to do with declining business sentiment, same with the FOMC lowered growth outlook.


According to FactSet the blended rate for Q2 earnings growth is now -5.1%. This is -0.2% lower than last week, there have been 3 reports so far. Of those reports only 1 has beaten on EPS and one on revenue. Since the end of the previous quarter expectations for 8 sectors have been revised lower.


Looking forward growth is still expected to return in the 2nd half but projections remain weak. Third quarter estimates have been lowered to 1.3%, down a tenth, while the 4th quarter remains steady at 7.6%. Full year 2016 earnings growth has been revised down a tenth, full year 2017 remains steady at 13.6%. There are 8 reports scheduled for this week, the bulk of reports are not due out until after 7/11 when Alcoa reports.


The Dollar Index

The dollar fell today as the pound and euro gained, due to the Brexit polls. The Dollar Index fell a little more than -0.5% in today's action, falling from the 78.6% retracement level and extending the drop below the short term moving average begun last week. The index looks set to move lower on positive EU sentiment, provided the Brexit does not happen. Near term support may be present at the $93.30 level, a move below here could go as low as $92.62 and a retest of the 100% retracement level. The indicators are showing what could be a strong bearish signal; increasing bearish MACD confirmed by a strong bearish stochastic crossover. Also of note, Janet Yellen begins two days of testimony before congress tomorrow, it should be interesting.


The Oil Index

Oil prices rose today, WTI gaining more than 2.65%, as Brexit fears receded and global growth fears are alleviated. Helping today's move in oil was a draw down of supply at the Cushing facility greater than a half million barrels. Also affecting today's trade is the expiration of the July futures contract tomorrow. WTI is now trading near $49.25, resistance is likely to set in near the $50 level.

The Oil Index jumped about 2% on today's gains in oil to trade above the short term moving average. The index remains range bound, between 1,100 and 1,175, with indicators consistent with a trading range. This range is likely to continue until we get a definitive move in oil, one way or the other. If the index continues to move upward now first target for resistance is at the top of the range, 1,175, with the 1,100 level as support and the short term moving average acting as a pivot point.


The Gold Index

Gold prices fell on the Brexit news as risk on trading overcame the flight to safety. Spot prices fell as much as -1% intraday, trading below $1,280, before regaining some but not all of today's losses. If the dollar continues to move lower gold prices may recover and retest resistance at $1,300, if not a move down to test support near 1,250 is also possible. For this week, gold's movements are tied to the Brexit, once we get past that dovish Fed outlook and economic data will come back to the fore. With rate hikes apparently off the table for the time being a weakened dollar and stronger gold seems inevitable. The Fed Watch Tool shows a 12% chance of rate hike in July, 33% in September and only 36% in November. By December it moves up above 50%, but only to 51%.

The gold miners remain strong despite the seesaw in gold prices over the past week or so. The Gold Miners ETF GDX moved up today after a lower opening, closing with a loss near -0.5%. Today's action helps confirm support at the $25 level and the bottom of a congestion band that has been forming over the past two weeks. This band/range may continue into the end of the week while we wait on the outcome of the Brexit but like with gold, future direction is more tied to the FOMC and the dollar than anything else. A fall from this level, dropping out of the range and below the short term moving average, would be bearish and could go as low as $22.50. A move higher will find resistance at the top of the band, near $26.75. The indicators are basically bullish but with momentum receding to near 0 and stochastic possibly rolling over at the upper signal line so for now at least, it appears as if resistance is holding. A break above resistance would be bullish and could take the ETF up to the $35 level in the short to long term.


In The News, Story Stocks and Earnings

Wal-Mart made the news today when it announced a new deal to enhance its presence in China. The deal, a sale of its online resources to JD.com, the 2nd largest online retailer in the country, is seen as a positive for both companies. It is expected to help Wal-Mart sales online and in physical stores and help JD.com compete with Alibaba. Wal-Mart is reported to receive about 5% of JD.com should the deal be consummated. Shares of Wal-Mart gained about 0.5% in today's action to trade near a 10 month high.


Facebook came under scrutiny today as the board and Mark Zuckerberg seek approval for him, Mark Zuckerberg, to retain majority voting control even as he sells off his stake in the company for philanthropic reasons. The vote, if successful, would create a third class of stock with no voting power in order to help him keep control. Shares of Facebook gained 0.66%, trading in a very narrow range, but are still below the short term moving average with very weak indicators. A move down to $110 is very possible.


Lennar and KB Homes are set to report earnings tomorrow; Lennar is set to report before the open, KB Homes after the close of trading. Expectations for both are low but with the strength in new homes sales and starts could easily beat them. As a recap, April New Home Sales were up more than 16.5% from March and up 23.8% from April last year; May Housing Starts fell moderately from the previous month but are up 9.5% from the same time last year. The XHB Home Builders SPDR gained more than 1% in today's action, moving above the short term moving average, but remain within the three month range. The indicators are mixed but could be rolling into a bullish signal, positive earnings reports from these two companies could help.


The Indices

The indices tried to make a strong rally today, and almost succeeded. The major indices gained more than a full percent in early trading, only to give up most of the gains by the end of the day. The day's leader was the Dow Jones Transportation Average which closed with a gain of 1.09%. The transpots made a strong move higher, intraday, to test resistance at 7,750 and the short term moving average but was not able to hold it. Today's candle is a smallish white bodied candle with long upper shadow, indicative of resistance at these levels. The indicators are mixed, reflecting a bounce from support begun last week but otherwise bearish and consistent with range bound trading.


The 2nd largest move in today's session was posted by the NASDAQ Composite, 0.77%. The tech heavy index gapped higher at the open, moved up above the short term moving average, and then fell throughout the day to create a bearish candle. Today's move appears bearish and confirming resistance at the short term moving average with downside target near 4,800. The indicators are bearish as well, but a little mixed as the bearish MACD may have peaked and stochastic %K is moving higher. A move below support would be bearish and could take the index down to 4,750 or 4,700 in the near term.


The next largest gain in today's session was made by the Dow Jones Industrial Average. The blue chips closed with a gain of 0.74% after moving higher to test resistance near 18,000. Despite the late day sell-off the index was able to close above the short term moving average. Even so, it appears more range bound than not, especially in the nearer term, with resistance at 18,000 and support near 17,500. The indicators are currently bearish but consistent with a bounce from the bottom of the range, possibly rolling over into a bullish signal but that would require a break above resistance.


The S&P 500 made the smallest gain in today's session, only 0.54%. The broad market created a small white bodied candle with long upper shadow, indicative of resistance at that 2,100 level. Despite the late day sell-off the index was able to close above the short term moving average, a potentially bullish scenario. The indicators are mixed, consistent with range bound trading. Support appears to be near 2,050 with resistance currently near the all-time high.


The indices are range bound and do not appear ready to break out just yet, in either direction. The Brexit is certainly a concern and will likely drive the market this week although I still think earnigns season will turn out to be more important. The Brexit results will likely have an impact on earnings outlook, either good or bad, but until we get into the season we really won't know what to expect going forward. For now, we are still expecting to see a poor earnings season and broad market projections continue to decline so there is little reason to expect the market to rally. The positive factor is that the market is still expected to return to earnings growth next quarter, so long as this remains true any correction/pull-back caused by this earnings cycle will likely be a prime entry point for longer term positions. I remain cautious for the near term and waiting for the next good signal for entry.

Until then, remember the trend!

Thomas Hughes