The Brexit crash was not a one-day wonder but a two-day crash. In terms of market crashes the -940 Dow points was up near the top in the record books but in terms of duration, it had to be even higher. The two-day drop was completely erased in only four days. We could call it three days because the 19-point gain on the Dow on Friday was not material compared to the 940-point drop.

The volume on the two crash days totaled 25.8 billion shares. The volume on the three rally days totaled just over 25.1 billion shares. It would appear it was an even trade BUT quite a few stocks failed to recover their losses. The big cap indexes saw most of the leaders regain the losses and even add a few points but the stocks in the bottom half of the indexes are still down by 20% to 50% from the prior Thursday's close.

That market weakness was being hidden by the outperformance of the Dow stocks. The generals were leading the charge but the troops were lagging behind.

This sets up an interesting problem for next week. Do traders take profits in those leaders and if so do the laggards sink lower as well? OR, will the generals stand their ground and wait for the troops to catch up?

With the strong resistance, it is going to be a fight to move higher without a broad market consensus. The bargain hunters have run out of bargains with the most loved stocks already back at resistance. Now they are faced with the age-old question. If a stock did not rise appreciably in a strong rally should I buy it now that the rally is over? I suspect the answer is no. Those lagging stocks will not be in favor next week.

The S&P is right at the resistance level that has held it back for the last year. Will next week be any different in a low volume environment?

The broader NYSE Composite came to a dead stop at primary resistance on Friday at 10,515 with secondary resistance at 10,640 and the prior Thursday close. Would you place a bet on a breakout on the NYSE given the recent track record?

The British pound rebounded slightly from the post Brexit lows early in the week but then faded again on Friday when the EU heads were talking about enacting stiff penalties on the UK trade deals. Whether they will be able to actually get away with that attempt will not be known for months. The pound should continue to fall as negative headlines appear.

The falling pound, euro and the rising dollar are going to seriously impact earnings for U.S. corporations doing business in the UK and Europe. The euro dropped from 111 to 107 by Monday's lows but has rebounded to 108.60 on Friday.

Gold is continuing to move higher with a close at $1,344 on Friday and that is a 52-week high. However, that was only a 1.8% gain for the week. Silver actually exploded with an 11.4% gain as the poor man's gold was in high demand. With more EU countries talking about exiting the EU there is a potential for a real breakup of the organization in the long term. As countries talk about holding referendums, the precious metals are seen as a flight to quality and a safe haven for volatile currencies.

The Dow Transports declined to 7,029 from 7,700 and nearly recovered all the lost ground by Friday. The initial concern was potential travel restrictions once the UK actually left the UK but that is two years from now so the fears were premature. Low oil prices should be fueling a rally in the transports but constant cuts to global GDP predictions are weighing on the sector.

The semiconductor sector was a laggard last week after Merrill Lynch cut the chip stocks and multiple analysts cut Apple suppliers again on worries about low shipments. This was a factor preventing the Nasdaq from moving higher than it did.

The S&P-400 midcap index is still the strongest of the pack. The S&P-400 ETF is only 9 points from a new high. The dollar/pound/euro is not as big of a problem for the midcap sector and we could see that high tested in the coming weeks, assuming the big cap indexes do not roll over into the summer doldrums.

The percentage of S&P stocks over their 50-day average dipped to 22% on Monday but rebounded to 60.9% on Friday. That is a major reversal and indicates how many stocks were already trading near their 50-day when the Brexit occurred.

The percentage over their 200-day average dipped to 53% and rebounded to 69%.

This should be an interesting week as we watch to see if the rally continues or the gravity from the summer doldrums pulls the indexes back into the recent congestion ranges. We have about a 600 point Dow range and 100 point S&P range where the indexes can chop around for the summer without doing any major damage. With the continued uncertainty over the UK exit and the political conventions ahead, we could see some market weakness appear.

Enter passively and exit aggressively!

Jim Brown

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