The markets are coiled up like a tightened spring and there will be a major move only we do not know in which direction. The uncertainty over the Brexit vote on Thursday has caused many investors and funds to move to the sidelines ahead of the event. Mutual fund cash is at a multiyear high at 5.7% and more than $100 billion has flowed out of equities year to date. Investors do not want to be caught long if UK votes to exit the EU.

However, as I have stated in my other commentaries, there is no immediate economic impact from a vote to exit. Once the UK lawmakers file the required Article 50 notice there is a two-year countdown clock before the actual exit. Since lawmakers are not likely to rush to file the notice it will be more than two years before anything happens. The actual vote is not binding and lawmakers could ignore it but that is not likely to happen since it would produce some ugly demonstrations and many would be voted out of office.

If the vote is to stay in the EU, all the pent up uncertainty would evaporate in an instant and the global markets would rocket higher. In fact, three polls released over the weekend show the stay camp posted significant gains and the Daily Mail newsletter recommended a stay vote on Sunday. The Sunday Times newspaper showed the stay camp had a 44% to 43% margin over the leave camp. Another poll showed the stay camp had a 3 point lead. Yet another poll by Opinium showed the sides dead even at 44%. The S&P futures are up +20 on Sunday evening.

This shows how depressed the market was heading into the vote. While the positive polls and Mail recommendation do not guarantee a stay vote, it does narrow the contest significantly. The prior polls had a 4-6 point spread in favor of leaving. There will be more polls over the next three days and each will impact the market. Campaigning was cancelled on Fri/Sat after the MP Jo Cox was killed. Cox was a strong supporter of staying in the EU. Campaigning was set to resume on Sunday.

With the futures up +20 the S&P is set to open around 2,091 if the gains hold overnight. That is still under the strong resistance at 2,100 and again at 2,116. With the polls so close I would expect to see any post expiration short covering gains on Monday decline on Tue/Wed if the next round of polls switch the lead back to the exit camp.

The Dow closed at 17,675 and the Dow futures are up +150 on Sunday evening. That would propel the index back over 17,800 but the resistance at 18,000 was rock solid the last time we visited that level. The entire 17,500-18,000 range has been trampled by multiple moves over the last three months. Eventually the range will break but probably not until after the vote.

The Nasdaq should not be a factor on Monday unless the short covering shifts into high gear. The Nasdaq futures are up +48 and that would put the index at 4,850 and still well under strong resistance at 4,900 and again at 4,968. The tech stocks have been weak lead by the biotech sector and the chip sector. The index has lagged the Dow and S&P in the recent gains.

The economic calendar has Janet Yellen testimony on both Tuesday and Wednesday. If she felt she was too dovish in her comments last Wednesday or she decides to rebut the James Bullard comments from Friday, that could be market negative.

The Brexit vote is Thursday and Friday has the Russell index rebalancing. Volume will be high. Typically, the market is negative for the rest of June after the quadruple witching expiration. Obviously, the events in the UK will determine direction in 2016.

I would caution about jumping into a lot of long positions if the market is going vertical on Monday. What goes up on one poll can come down on another. The time to enter new positions will be the following Monday when all the news is stale and the volatility returns to neutral.

Jim Brown

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