On Thursday, investors bought the rumor UK would remain in the EU. On Friday, they sold the news when that rumor proved untrue.

Market Statistics

Friday Statistics

There are not enough adjectives to describe the abrupt market decline when the Brexit vote did not turn out as expected. On Thursday, the Dow rallied +230 points and the S&P gained +28 after multiple polls suggested the tide had turned for the remain camp and citizens were not likely to vote for the exit. Even as late as Thursday afternoon with the vote underway there were still polls giving the edge to the remain camp. After the close on Thursday another poll was released showing the remain voters would prevail. The S&P futures spiked another +13 points in the afterhours session at 6:PM. Within an hour that had reversed 27 points to a decline of -14 and the carnage had begun. The futures eventually lost -87.50 for the day on Friday.

Those betting on a remain vote lost a lot of money while those betting on a Brexit were well rewarded. Even the bookies in London had it very wrong with odds showing an 81% chance of staying in the UK. They said the betting was very heavy with hundreds of millions of pounds wagered on the outcome. The number of bets were heavily favoring an exit but the big money bettors were heavily favoring a remain vote. The big money bettors are rarely wrong but this was one of those times.

The Dow fell -611 points to close at 17,400 and near the lows for the day. The S&P lost -76 points to close at 2,037. The Nasdaq Composite lost -202 points to close at 4,707. I am sure everyone noticed that each of those levels was strong support. The market crashed but critical support levels from May held.

You would think a decline of that magnitude that stopped exactly on critical support levels, would probably bounce the following day. However, as Art Cashin so eloquently put it, "Monday could be a baby and bathwater day."

I believe it will be margin call Monday. Everyone that was over leveraged on margin that did not have stop losses or continued to hold in hopes of a bounce, will get a margin call saying deposit more money or your account will be liquidated. Selling from those events normally comes at 10:AM and 2:PM. Tuesday would be the best bet for a rebound but that does not prevent institutions from buying that support on Monday while thinking any further declines will be manageable.

The damage from the Brexit vote was global. Markets all around the world plunged and currencies soared. The British pound fell -8% to lows not seen in more than 30 years.

The Japanese Nikkei was the biggest loser in the list below but some indexes not in the list fell even harder including Italy -12% and France -8%. They fell harder because of politicians promising an exit vote in their countries. Scotland is likely to vote for independence and the Netherlands is expected to schedule their own Nexit vote.




I want to remind everyone that NOTHING has changed in the UK. Prime Minister David Cameron said he was tendering his resignation. He was strongly in favor of staying in the EU. The PM is not voted on by the people. In the UK he is chosen by the party with the most votes in Parliament. His conservative party is the majority party and they will choose a successor. However, that may not occur until their conference in October. Boris Johnson, has already positioned himself as the potential replacement. British analysts claim the exit discussions will not begin until a new PM is chosen to lead the UK through the exit process. Some analysts believe the UK will not file an Article 50 notice of intent to leave until the new PM assumes office. That Article 50 notice would then start the two-year countdown clock.

However, there is no requirement that a notice be filed. Also, the public vote is nonbinding on Parliament and the MPs would have to ratify the document. Currently there are 463 MPs who do not want to leave the EU and 150 MPs that voted to leave. It may be a challenge to get the referendum or the notice ratified into law. It may be a long time before the UK actually leaves the EU.

As I have written before, the biggest challenge for the EU is not the UK but the desire of other countries to leave the EU as well. All day long on Friday, there was constant chatter about who will be the next to leave. Ireland and Scotland are expected to schedule their own votes to leave the UK after both countries voted to remain in the EU. Italy, Spain, Portugal and the Netherlands are also candidates to schedule votes to leave the EU.

If the UK does file an Article 50 request to exit the EU, it must be approved by 72% of the remaining 27 countries with a minimum of 65% of the population. It must also be approved by the EU Parliament by a simple majority. The UK has a long and winding road to travel before it can be independent again.

The Brexit will have an impact on the U.S. markets in the months ahead. The 2% rise in the dollar, 8% drop in the pound and 2.7% drop in the euro will make it harder for U.S. multinational companies to sell in Europe and the UK. There will most likely be plenty of earnings warnings over the next couple of quarters because of the currency translation issues.

On the positive side for equities is that the Brexit probably took the Fed out of play for the rest of 2016. There is now only a 1% chance of a rate hike in July and a 7% chance for a rate cut. September is showing identical numbers. November is showing a 1.9% chance of a hike and 7.0% chance for a rate cut. December is showing a 5.3% chance of a cut and 23.7% chance of a rate hike according to the CME FedWatch Tool. Instead of one and done for 2016 it is now looking like "none and done." The Fed cannot risk pushing the dollar higher when the European currencies are already plunging. If the dollar continues to spike they may be forced to cut rates to maintain currency stability.

Economics

There were some economic reports on Friday. The Durable Goods Orders for May fell -2.2% compared to a 3.4% rise in April. Analysts were expecting a -0.5% decline. Total shipments declined -0.2% and inventories fell -0.2%. Core capital orders fell -0.7% and shipments fell -0.5%. Orders for autos fell -2.8% and defense orders fell -28%.

Consumer Sentiment for June fell from 94.3 to 93.5. That is down from 94.7 in May. The present conditions component rose from 109.9 to 110.8 but the expectations component fell from 84.9 to 82.4. Analysts blamed it on the weak jobs numbers and rising gasoline prices. I blame it on the outlook for the elections with both candidates having record unfavorables with Trump at 70% and Clinton at 55%. There is not a lot there to get excited about.


The calendar for next week is relatively light. There are lots of reports but the ISM on Friday is the only one that could move the market. The GDP report on Tuesday is not expected to change much but a drop into negative territory would be a market mover.

Yellen speaks again on Wednesday and now that Brexit is behind us, she may have a different tone. The Richmond Fed surveys on Tuesday are informative but not something that traders really watch.

The following week we will get the June payroll data and that could be the final nail in the July rate hike coffin if the numbers come in weak.


There was also one earnings report. Finish Line (FINL) reported earnings of 23 cents that beat estimates for 22 cents. Revenue rose +2.3% to $453.5 million. The CEO praised Adidas for a "ton of momentum" saying the excitement around that brand is global, not just in the USA. He also said the basketball business has been challenging but Stephen Curry's sneakers have been a bright spot. He said basketball sneaker prices are too high and many styles are missing on fashion. That was a dig on Nike, which represents 70% of Finish Line's sales. He did say the Nike running shoes were still strong. Nike (NKE) shares closed at a 10-month low after the comments and the market crash. Finish Line shares gained +22% on short covering after the earnings beat. That is tough to do in Friday's market.


Headphone maker Skullcandy (SKUL) agreed to be acquired by privately held consumer technology company Incipio for $177 million. The company agreed to pay $5.75 in cash representing a 29% premium over the closing price on Thursday. Skullcandy will have a month to shop for a better deal. More than 8.29 million shares traded, much more than the average daily volume of 223,000 shares. Back on June 8th, the company said it was considering a "Go-Private" transaction where the founder, Richard Alden, would buy some or all of the company's stock. Alden owns or controls about 15% of the stock. Apparently, he decided against that plan.


Goldman Sachs (GS) lost 7% and was the biggest drag on the Dow with an $11 drop because 26% of their revenue comes from the UK. Banks like Goldman will have to decide whether to move to another major European city like Paris or Berlin in order to remain in the EU and face potentially onerous banking rules. The UK could suffer significant penalties for leaving the EU and one of them could be limitations on its European banking business. If the EU does enforce additional rules all the major banks could move a significant portion of their business.

JP Morgan gets 15% of its revenue from the UK and has 16,500 employees there. CEO Jamie Dimon was actively campaigning for the UK to remain in the EU in order to retain the open EU banking rules. He told his employees he did not want to move outside the UK but could be forced to move if the breakup was not peaceful.


The European banks were crushed because of the currency issues surrounding the Brexit vote. Credit Suisse (CS) lost -16%, Royal Bank of Scotland (RBS) declined -27%, UBS Group (UBS) declined -13%, Deutsche Bank (DB) -17% and Barclays PLC (BCS) -20%. RBS is headquartered in the UK and does most of its business in the area. These banks are going to be hit the hardest on any new rules affecting banking between the UK and EU.


Priceline (PCLN) lost -$158 or -11% on the Brexit vote. Expedia (EXPE) lost -7% and TripAdvisor (TRIP) lost 6%. Priceline derives a significant amount of revenue from Europe with its Booking.com hotel reservations unit based in the Netherlands. That service is heavily used in Europe. Priceline gets 85% of its revenue from international markets primarily in Europe.


Amazon (AMZN) shares fell -3% to close under $700 for the first time in a month on UK concerns. Amazon has about 10 distribution centers in the UK and 20 smaller centers that sort packages before they are delivered to local post offices and shippers. That is only a small portion of the 300 distribution centers globally but the UK is a shipping hub for Amazon. The company stores inventory for sellers and any restrictive cross border shipping rules imposed on the UK by the EU could be a major challenge. Without the unrestricted passage between EU countries they enjoy today, it could add delivery delays as well as tariffs.


The biotech sector completed a round trip to and from the ASCO conference. The stocks began to rally in mid May and rallied into the conference before immediately rolling over and retracing all their gains in the last three weeks. The sector is very close to a new 52-week low. The Brexit vote is not expected to impact the sector but shares of the IBB fell -5% anyway. When you have to raise money fast you sell everything.


Volume was extremely high on Friday because of the sell off and the Russell index rebalance at the close. More than 15.2 billion shares were traded. The CME said they traded more than 30 million contracts, more than twice normal volume. However, the selling was orderly despite the heavy volume. There were no trading halts and the Volatility Index ($VIX) actually declined 4 points intraday after spiking to 24 at the open. By 10:AM it had declined to 19.48 but it began to rise slowly the rest of the day as investors bought puts to protect against a continued decline. When the market began to accelerate lower at 2:PM the VIX began to accelerate higher. At 25-30 it is at a level that is normally associated with a strong buy signal.



Crude prices fell -5% to $47.57 on worries over slower demand growth as the UK tries to work through it the Brexit. Mostly, the decline was due to the sharp rise in the dollar. There were no specific factors impacting oil prices for the week.


Active rigs declined -3 to 421. Oil rigs fell -7 to 330 and gas rigs rose +4 to 90. It was an uneventful week in the sector. However, after three weeks of rebounds in active oil rigs they gave up most of those gains with Friday's -7 rig decline. Oil prices will have to stay over $50 for several weeks before we see a real increase in rig activity. Producers are scared of incurring the expense of putting rigs back to work only to have prices decline again.




Markets

S&P said more than $830 billion was lost in the U.S. markets and more than $2.1 trillion globally. Friday was just the first day and losses could continue if the currencies continue to decline. The Bank of England and Bank of Japan both said they were ready to intervene in the currency markets to halt the declines. That may not be as easy as it sounds given the severity of the event.

However, this was a government created event not an economic event. It was well telegraphed for months in advance and the actual economic impact could be more than two years away. As one analyst said, it was catalytic not cataclysmic. The initial market impact should be brief.

What made it worse was the pre vote, buy the rumor, rally that lifted the Dow +230 points on Thursday. That boosted spirits and lured investors who had been cautiously waiting on the sidelines for the event to pass, back into the market. The results were disastrous.

Fortunately, the weakness should be short lived. Funds were sitting on near record amounts of cash approaching 6%. With the end of the quarter only four days away, they will need to put some of that cash to work. That suggests there could be a substantial buy the dip rally in the coming days.

The 15.2 billion shares of volume may have been a new record. I could not find a day with more volume but I could only look back a couple years. Decliners beat advancers 6,142 to 1,234. Declining volume was 13.2 billion to 1.9 billion of advancing volume or 6:1. On Thursday up volume was 5:1 over down volume but only 6.4 billion shares were traded.

The S&P closed at 2,037 with a loss of -76 points or -3.6%. This is just under strong support at 2,040 from May and just over support at 2020-2025. Last week I suggested a dip to the 2,040 level would be a buyable event. I am sticking with that recommendation. While we might dip to that 2,020 level, I do think cooler heads will prevail and the dip will be bought. The rebound could be strong now that the initial uncertainty about the event has passed.


The Dow crashed back to major support at 17,400 with a -610 point loss. On Thursday, the Dow closed at 18,008 and this makes the second time in June the Dow has failed at that level. All Dow components were negative some may remain negative. Those are the banks, energy companies, Caterpillar, IBM, UTX and Boeing. They have significant revenue in Europe and the currency issues are going to be a challenge. One you would not expect is Coke. They have a very large business in the UK and they could warn on currencies when they report earnings.

The Dow could remain weaker than the S&P because the majority of the Dow stocks will have currency issues. The only difference is the degree of impact. The international S&P companies derive about 50% of their revenue from Europe but I do not know how much of that is from the UK. Only about 50% of the S&P companies have any material exposure to Europe. This will insulate that index to some extent compared to the Dow.

Resistance is so far above it is not material to this discussion. We could have a challenge at 17,600, which was prior support.



The Nasdaq Composite crashed back to support from May at 4,700. This produced an immediate halt for the decline with the low at 4,698.42. That was momentum that carried it through support. There was a rebound of about 32 points from that level but selling returned at the close.

The Nasdaq has light support at 4,600 and again at 4,500. However, any material decline under that 4,700 level could turn into a rout. The Nasdaq composite was the weakest of the major indexes with a -4.1% decline. You can thank the 5.1% decline in the Biotech Index ($BTK) for the added momentum.

This was the Nasdaq's fourth consecutive weekly loss and it is on track for its second consecutive quarterly loss. That would be the first time since 2011 that has happened.



The Nasdaq 100 ($NDX) lost -4.1% as well and closed exactly on support at 4,285. Having all the major indexes close right at support tends to lend credibility to my expectations for rebound next week. With all the big cap techs losing big bucks I am surprised the drop did not continue.


The Russell 2000 closed at 1,127 with a 3.8% drop and there is no support anywhere close. The next support level would be the band from 1095-1110 where it has bounced before. However, the week after a Russell rebalance the R2K is normally bullish as funds clean up their Friday stock switch with new buys of the stocks added to the index. Whether that will happen this time in light of the external events is unknown.


I would pay a fortune for an accurate crystal ball this weekend. With the indexes at support, it suggests a rebound next week. With funds sitting on piles of cash ahead of the quarter end, they should be putting that to work. However, in normal years June tends to close at the lows. We can check that box off now because we are at the lows. Any rebound will not negate that trend.

We are headed into a period of seasonal weakness but as I showed last week, the markets are about evenly split between 8-12% moves over the summer months. Some are down and some are up. Right or wrong, I plan on buying the dip on Monday with the knowledge we could dip lower before a rebound appears. Markets rarely bottom on Fridays. When I say buy the dip, I do not mean just blindly buy something in the middle of a decline. I should say "buy the rebound" because I like to see a bounce first before I commit to the entry.

My friend Art Cashin suggested waiting until 11:AM on Tuesday to buy the dip. With margin call selling at 10:AM that gets us past the potential weakness. That would be a relatively safe plan if there were such a thing as a safe plan.

 

INDEPENDENCE DAY SPECIAL!

Welcome to our mid-year Independence Day Subscription Special. Save 50% or more on your subscription!

The options market isn’t waiting for you.  And you shouldn’t wait to keep Option Investor coming at the lowest prices you’ll see until December! There isn’t a minute to spare.  Order now.

Renew for as little as $249
for six months,
ONLY $1.38 per day


 


If you like the market commentary you have been receiving and you are on a free trial then now is the time to subscribe. Do not wait until you miss a newsletter to decide you want to take the plunge.

subscribe now


Random Thoughts


Brexit Do-Over?

After markets and currencies all around the world collapsed on the Brexit vote, many Britons are asking for a do-over. A petition was started on the House of Commons website early Friday and in just a couple hours it had over 200,000 signatures requesting a new vote. By Friday evening, it had 527,000 signatures. They want any vote invalidated if it does not win with a 60% majority. The Brexit vote passed with a 52% majority. The volume was so high it crashed the House website hosting the document. The House of Commons said it had seen "high volumes of simultaneous users on a single petition, significantly higher than on any previous occasion." UK citizens are suffering from voter's remorse. In the 12 hours after the vote Google reported a surge in searches for "what happens if the UK leaves the EU." Apparently, quite a few voters were stunned by a result they had never considered.


Bullish sentiment declined -3.4% to 22.0% for the week ended on Wednesday. The survey ends on Wednesday so the Thursday/Friday moves are not in the numbers. Neutral sentiment jumped 5.7% to 42.8% and bearish sentiment declined -2.3% to 35.2%. If the market does not rebound early in the week it will be interesting to see what the numbers look like next Wednesday with the Brexit crash included.



Dozens of seminar attendees at a Tony Robbins event in Dallas, suffered burns after trying to walk across hot coals. The "Unleash the Power Within" three day event encourages attendees to "storm across a bed of hot coals" in order to "overcome the unconscious fears that are holding you back. Once you start doing what you thought was impossible, you will conquer the other fires in your life with ease" or so Robbins claims.

Unfortunately, "dozens" suffered burn injuries after attempting the feat. At least five people ended up hospitalized after five ambulances were called to treat the injured. A Robbins spokesperson said more than 7,000 attendees successfully participated in the fire walk while a few had to be hospitalized. She said, "We always have a few people with some discomfort afterwards and we do our best to take care of them." About 1% experience "hot spots" which are similar to a sunburn and can be treated with Aloe. She said the injured "may" have been trying to take selfies as they walked across the coals. Source

Personally, I think they need psychological treatment if they are willing to walk across hot coals.


An Illinois man named Gambles won the lottery for the second time using the same five numbers. He plays the daily Lucky Day Lotto and has bought a $1 ticket every day for the last nine years. On June 7th on his second win, he won more than $1 million. The prior win was 9 years ago. At $1 per day, he has spent more than $4,000 over nine years. That is a pretty good return on his investment. He says he has played the same five numbers every day. They are the numbers for his jerseys from football and basketball when he was in high school. He is planning on setting up annuities for his daughter and granddaughter. He said he will continue to play the same five numbers every day until "I can't play anymore." Source


Why did UK voters decide to leave the EU. There were multiple reasons but immigration and regulation were high on the list. UK citizens did not like being told they had to accept hundreds of thousands of Syrian refugees as mandated by the EU. The UK had to pay the EU 20 billion euros a year for the privilege of being governed by the EU parliament.

The EU government was going overboard in their regulations and it angered UK citizens on a daily basis. Other EU rules included:

Bananas must be nearly straight. A 1994 regulation specified that bananas must be "free from abnormal curvature." Cucumbers must be perfectly straight. Any curves were not allowed. This law was overturned by voters 3 years ago.

Fruit like apples, oranges, lemons, etc, must be a certain diameter to be sold in retail markets. Small fruit was banned. For instance, a kiwi is required to weigh a minimum of 62 grams. Kiwis under that weight could not even be given away.

The size, shape, wattage and type of light bulbs were specifically regulated.

Vacuum cleaners could not be over a certain power rating in order to reduce electrical usage across the EU. There were plans to extend the regulations to cover hair-dryers, toasters and other appliances but the changes were tabled amid fears it would influence the Brexit vote.

Water bottles could no longer be labeled "improves hydration" after a 2011 law that claimed there was no evidence to suggest drinking water stops dehydration. This regulation was also overturned.

Diabetics taking insulin could lose their drivers license if they ever had an attack of hypoglycemia.

A 2009 law banned eating horses after lawmakers realized more than 2 million horses were eaten in the EU every year. Now all horses, ponies, donkeys and related animals must have a "horse passport."

A law passed in 2010 stated that a fruit preserve must contain at least 60% sugar to be called a jam. Anything less had to be relabeled to be called a "fruit spread" while a low-sugar jam with less than 50% sugar was named a "conserve."

A 2013 law required bottles of olive oil on restaurant tables to be non-refillable.

Balloons must contain a warning text printed on the latex itself saying injuries and death could result from their use. Children under 6 were not allowed to blow up balloons without adult supervision.

Party buzzers, the kind made out of rolled up paper that unrolls and makes a sound when blown, are illegal for children under 14.

The EU ruled there was insufficient evidence to establish a cause and effect relationship between the consumption of prunes and normal bowel function and they could not be referenced as a laxative.

Eggs and other food products could no longer be sold by quantity as in a dozen eggs or a bag of 10 apples. All food products had to be sold by weight.

There was a constant barrage of stupid laws coming from the EU that touched every facet of human life. More than 400 new regulations have been passed since 2010. The bureaucrats or "eurocrats" as they were called in the UK were running wild and multiplying in astonishing numbers. There were reportedly 40,000 in the UK alone.


 

Enter passively and exit aggressively!

Jim Brown

Send Jim an email

 

"You can lead a human to knowledge but you can't make him think."

Unknown