Brave New World? | Global Market Perspective

uk picThere is a treasure trove of market phenomena, highlights, low lights, and observations that are byproducts from the vote by the British electorate to leave the European Union.

The timing was paradoxically matched with a time on the calendar that has typically produced, or at least threatened fresh market highs, only to have buyer’s remorse set in shortly thereafter.  On that note, there is some chatter that many voters in the UK are having  voter’s remorse only days after their decision to begin the process of separation from the EU.  It’s highly advised that chatter be ignored.

There will not be a  “Do Over”.

After some turmoil and definition of a new trading range for the British Pound,  Markets will do what they do best, they will DEAL WITH IT!!

Putting Friday in Perspective.

Last Week Major Stock Market averages had rallied +2% Monday thru Thursday, mostly in anticipation of the UK vote producing a “Remain” outcome.  The 3½ to 4% decline Friday, left the decline for the week at between -1½ to 2%.  Had someone told you a month ago that the UK was going to vote to leave the EU in late June, the margin of the vote would be 4% and the S&P 500 would have a decline for the week of -1.6%, anyone’s reaction would have been NO WAY, we’ll be down a lot more than that.  Relax, there’s always this week.

The Volatility index VIX, traded at  25 on Friday.  Keep in mind that we started the day on Friday with the S&P 500 within 0.5% of the all time closing high of 2130.82.  The 25 reading on the VIX is the highest reading since February when the market was in danger of falling off a cliff at S&P 500 1820.

$vix

The great anomaly here is that historically the VIX is almost always a great contra-indicator and spikes to high levels during periods of fear and near panic after an extended period of market weakness.   For the VIX to trade this high on the first day of heavy selling with the market near its highs is very unusual.  It is either an indication of much more selling in the near future, and/or a sign that institutional managers were looking to hedge their portfolios through any means available.

The 10 year Note closed Friday with a yield of  +1.57% after trading as high as +1.41% very early in the morning.   I believe the +1.41% print was coincident with the BBC and ITV  officially calling the vote for the “Leave” outcome.

That was a “spike” of emotionally charged buying after which the 10 year US Treasury drew sellers steadily into the opening of US trading until the 4:00 close.  This is hardly representative of a Full Blown Risk Off day, as stocks were also for sale all day, closing near their lows.  Typically on a day of sharp declines in stocks from the opening to the closing bell, the 10 year Treasury would see buying all day, culminating with yields hitting their low at the end of the day.

Keep a close  watch on how the US Treasury market trades this week.

10 year note

The DJ Transports were one of the weakest sectors Friday, with a decline of close to 5%.  The Transports have been one of the best leading indicators of the overall market the last 2 years, hitting their peak in late December 2014 and bottoming out January 20 of this year. 3 weeks before the Broad  Market averages bottomed out on February 11.  Since hitting a closing high for this year at 8106 in mid April, the DJ Transports have put in three lower lows and lower highs, including posting a close  below 7500 on Friday for the first time since February 11.  Aside from all the geopolitical and macroeconomic news, the price action of the DJ Transports gives us the most concern from purely a technical market view.

Brave New World? | Global Market Perspective

I feel like this just scratches the surface of the countless crosscurrents that have all hit the market head on in the last few trading days.  I certainly feels like nearly overnight we’re in a very different market environment than we’ve been in since the recovery off the February lows.

I’m sure we’ll have plenty more to highlight the remainder of the week.

The Early Line:  Stocks will begin the day decidedly lower as pre market trading in US equity futures have been steadily deteriorating since very early this morning.  Keep in mind, Thursday is the end of Q2, and although it feels like we’re heading for a down week, managers may buffer the selling as the  week wears on to protect their performance numbers for the 1st half 2016.

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