Daily Market Commentary

Week In Review: Historic Brexit Vote Crushes Markets

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Brexit Vote Crushes Markets:
Becomes A Bear Stearns Moment, Not Lehman (Yet)

We received a record number of emails since Friday thanking us for our cautious stance. Stocks fell for a third straight week and was crushed on Friday after the U.K. decided to leave the E.U. Thankfully, our defensive stance has served us very well as this environment is outright ugly for most participants. The Brexit vote was a pivotal moment in modern history. It questions the legitimacy of the entire E.U. and could lead to more people wanting to leave, which threatens the existence of the E.U. The ramifications of this vote instantly spread across the globe as markets went wild. The selling began late Thursday night and spilled into Friday when the vote was finalized. We saw huge moves in currencies, stocks, commodities, and bond markets in every corner of the developed world. It is still very early and the situation is fluid so anything can change at any time. The vote also echoes what we are seeing in U.S. politics – a huge surge for the anti-establishment movement. The brexit vote reminds us of early 2008 when Bear Stearns failed and is not a Lehman moment, just yet. Going forward, the key now is to understand that the game has changed considerably and there is a huge question mark with respect to what lies ahead for the economy, markets, and politics. The rest of the fundamental story remains bleak as the global (and U.S.) economy was barely growing, so threatening the Brexit could easily spark a global recession. 
The technicals are deteriorating and do not look “good” either. Stepping back, the bull market is 7.5 years old which is considered an aging bull by any normal measure. There is a very high possibility that last the Brexit could be the straw that breaks the bulls back. More time and price are need to know for sure but if Feb’s lows are breached (1810 in the S& P500), odds favor we are headed much lower. Technicians also do not like the fact that last week was both an outside and negative reversal in the S&P 500 on a weekly basis, both have bearish ramifications. Filtering out all the noise, the market is still range bound with major resistance near 2134 and major support near 1810. Until either level is breached, we have to expect this sloppy action to continue. Looking forward, we have elections coming up in Spain, then the Jobs report and then we enter earnings season. It’s a never a dull moment on Wall Street. 
Monday-Wednesday’s Action:
Stocks opened higher on Monday after the latest Brexit poll came out over the weekend and hinted they will stay. But sellers showed up by the close and stocks ended well off their highs. The British Pound (FXB) gapped up on the news. JD.Com ($JD) rallied after Wal-Mart ($WMT) said it would sell its online business to the Chinese e-commerce company. Elsewhere, Boeing ($BA) opened higher after news broke that Iran had reached a deal to buy 100 planes. On Tuesday and Wednesday, Fed Chair Janet Yellen is going to testify in front of Congress and the actual Brexit vote is on Thursday.
On Tuesday, stocks edged higher after Yellen began her two day testimony on Capitol Hill. Yellen made it clear that she is confused and is not confident that the economy will improve at a fast enough pace in the near future to warrant more rate hikes. Stocks popped higher when her prepared statement was released but then began to drift lower. Almost immediately, Mr. Draghi, the head of the European Central Bank, began talking and stocks bounced again on his dovish comments. The fact that these central banks are so vocal is crazy. But that is 2016 for you.
Stocks fell on Wednesday as Yellen wrapped up her testimony on Capitol Hill and investors waited for Thursday’s Brexit vote. Stocks were mostly quiet with a little bounce in health care stocks early in the day on a favorable court ruling. But sellers showed up by the close and erased some of the gains by the close. After Tuesday’s close, Tesla (TSLA) made a bid to acquire Solar City (SCTY) and Tesla gapped down on the news.
Thursday & Friday’s Action:
Before Thursday’s open, stock futures were up nicely as the much anticipated Brexit vote officially began. Polls closed at 5pm EST, one hour after the market closed. Stocks rallied nicely on Thursday because the latest polls suggest the “remain” camp has a slight edge. Investors shrugged off the latest round of economic data. The government said weekly jobless claims slid to 259,000, not far from a 43-year low touched in March. Elsewhere, the flash Markit manufacturing PMI rose to 51.4 in June, up from 50.7 in May. Finally, new home sales slid 6.0% in May to a seasonally adjusted annual rate of 551,000 units. Overnight, the U.K. voted to leave the EU which shocked markets. Almost instantly, the British Pound crashed and stock markets around the globe suffered huge losses. Markets around the globe crashed which clearly reiterates our cautious stance.
Market Outlook: Stocks Hit Hard
The market remains range-bound as it failed to breakout above stubborn resistance (recent highs) again. Economic and earnings data remain less than stellar which does not bode well, especially after the Brexit vote. As always, keep your losses small and never argue with the tape. 

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