You know that instant of sheer panic when you are driving down the highway at 60 mph and suddenly see a massive pothole in your lane? The Brexit vote gave investors that feeling of sheer panic when a 1,000-point drop appeared in the market in only two days. We appear to have survived the sudden dip but we do not know if our tires have lost big chunks of rubber and whether the market suspension system is still intact. Investors breathed a sigh of relief as the markets recovered from the pothole but resistance is still there and we have a new kind of uncertainty clouding the market's future.
The UK voted to exit. The easy part is over. Now they have to install a new prime minister in September and that person will have to officially file the Article 50 notice with the EU and begin planning for life after the divorce.
That life could be rocky. Like a jilted spouse the EU is talking about all kinds of penalties in the form of restrictions and tariffs to make the UK regret filing those divorce papers. The alimony is expected to be harsh in order to dissuade other EU countries from initiating their own divorce proceedings.
The EU officials, like Angela Merkel, have refused to discuss any post exit treaties until the UK actually files that Article 50 request. The UK has said they will wait until the new PM is installed and probably after the normal party conference in October. Until then the UK and the rest of the world will have to wait to see if the treaty negotiation turns into a war council or cooler heads prevail and the penalties will be light.
The uncertainty remains for the global markets. The British pound continues to decline and this will make UK exports more attractive but imports are going to be challenged. U.S. multinational companies will be faced with additional strong dollar problems since the euro is also sliding along with the pound.
Add in the U.S. political conventions in late July and another FOMC meeting and this could be a rocky month.
The market rebound right to resistance was a knee-jerk reaction just like the preceding dip. The market rebound was aided by end of quarter window dressing by equity funds and an $18 billion boost to equities by pension funds rebalancing their bond/equity ratios. Investor bargain hunting was also in play. Now that the quarter is over and funds will no longer be buying the markets are stuck at resistance and there is the potential for some window undressing ahead of a seasonally weak period over the next three months.
The markets can move higher but the odds are slim. The outlook is for weakness to return but at a more gradual pace. The indexes may chop around at resistance for a couple days but the low volume market will probably have a tough time breaking through.
The S&P stopped right at 2,100 and that 2100-2115 range has been rock solid since last July. The 2040-2100 range could be where the S&P hides out for the next three months.
The Dow has similar problems from 17,925 to 18,165. That range has been solid resistance since last June. The 17135-18000 range is the likely traffic pattern for the Dow unless conditions change.
The calendar for next week is highlighted by the employment reports on Thr/Fri and the FOMC minutes on Wednesday. The minutes will be especially critical because this was the meeting that half the committee changed their position on rate hikes and the economic outlook. Analysts will want to know what happened.
The employment reports will be critical after the Nonfarm report for May only showed a gain of 38,000 jobs compared to the 180,000 expected. If there is a similar drop in jobs for June it will prompt a significant amount of economic speculation.
We are entering that period on the calendar where there is no material reason for investors to buy stocks. The market typically declines in August/September and the summer doldrums begin on Tuesday. That is the July 4th to Labor Day period where traders, investors and portfolio managers are thinking more about their vacations than what stock to buy.
Do not get me wrong. Markets can rise in July but rarely surrounding the political conventions. The political uncertainty is rising and investors are trying to decide which candidate would be the worst for their positions, who might win in November and then taking money off the table in advance. This is a period where story stocks and stocks that have been previously beaten up, tend to do the best. Investors will buy oversold stocks thinking they cannot get much worse.
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