Italian voters soundly rejected the sweeping constitutional changes on Sunday and the S&P futures fell -12 points.

Fortunately, they have improved significantly to only -7 but the market is still going to open lower on Monday if the futures hold. Analysts posting comments on Sunday evening suggest buying bonds and selling equities because of the growing political instability in Europe. I think that is a little reactionary and the negativity could blow over or at lease moderate by morning.

Prime Minister Renzi has confirmed he will resign and that will through the Italian political system in to turmoil until elections can be held next spring. Italian banks will be the hardest hit because it will be difficult to raise additional capital in an unstable situation.

There are worries that populism could pick up speed with the potential for the Five Star Movement (M5S), a populist, anti establishment party to gain control. The M5S has said they will call for an election to leave the euro. Euroskepticism is definitely on the rise in Italy and the Brexit has fired up movements in multiple countries.

Monday's front page on the Guardian.

Also complicating the overseas political picture, New Zealand's Prime Minister John Key unexpectedly announced his resignation. On the positive side, Alexander Van der Bellen, won the presidential election in Austria. He said his victory sent a "red and white signal of hope to all the capitals of the European Union." Bellen defeated the far right candidate Norbert Hofer.

With the U.S. futures down and Friday's market action less than convincing, there is a good chance the market could open down and possibly lead to further profit taking that was not completed last week.

I was hoping we could avoid a Nasdaq test of support at 5,200 and 4,700 on the Nasdaq 100. The S&P has tested support at 2,190 twice in recent days and the -7 point decline in the futures would see the index open at about 2,185. While that is not far enough away from that support to make a major difference, a close at or below 2,185 would be a minor sell signal. The 2,175 level is the next support to watch.

The Dow rallied on the strength of moves in Goldman Sachs (+16) and UnitedHealth (+10). Together than added roughly 200 points to the Dow for the week. I would seriously doubt that we see similar gains from any two Dow stocks next week. The Dow closed at a new high on Thursday and only lost 21 points on Friday. There is no visible weakness but those kinds of individual stock gain will definitely end.

The Dow has resistance at 19,250 and support at 19,000.

The Nasdaq indexes are the real problem. The Nasdaq Composite declined to 5,255 at the close with only a 4-point gain on Friday. Critical support is 5,200 and that could be tested at any time since we had two days last week where the index lost more than 50 points.

The Nasdaq 100 ($NDX) never made a new high and has nearly erased all the post election gains with a drop back to 4,700 and critical support. The big cap techs have been weak as institutions are rotating out of techs and into industrials, banks, defense and aerospace. There are no signs that trend has changed.

The small caps finally ended their string of gains at 15 days and promptly ran up a four-day streak of losses as limited profit taking appeared. The index was fractionally positive on Friday and I would expect support at 1,300 to be tested next week if the profit taking continues.

The economic calendar for next week is light with no market moving reports. The Fed rate hike the following week will be the focus. Even though everyone expects a hike, it will still be the topic of conversation all week.

I am relatively bullish on the market. Once the current bout of volatility passes, I do expect the market to set new highs before the end of December. Once into January, I fear we could have a recurrence of last January where funds began unloading right at the start of the New Year. That could be lessened if the excitement over the new administration continues to grow. I know that is a long shot but it is a possibility. With the market still near its highs, it would suggest we are going to see some continued window dressing into the end of December. However, multiple analysts have reported that funds are almost 100% invested and there is little cash left to orchestrate that final boost. That is where retail investors will help. They always buy in at market highs and as we saw last week dips on everything but tech stocks were bought.

I would be a buyer of index ETFs on any material dip on Monday that is related to Italy. I believe it will pass and that will just be one more excuse for the weak holders to leave the market.

Jim Brown

Send Jim an email



Don't forget to reward yourself with our 2016 End-of-Year Annual Subscription Sale!  You’ll save $1,147 when you renew now.

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 for at least a year! There isn’t a minute to spare. 
Order now.

Renew for as little as $495,
ONLY $1.35 per day