Last week’s price action in US equity markets was dominated by a downshift in economic outlook by the FOMC, mixed US economic data, heightened concern over a “Yes” vote in the UK’s referendum on European Union membership and as a result, souring of investor enthusiasm. In fact, four out of five trading sessions on the week and five of the last six were not only negative, but decidedly so in terms of internals.
Friday was in fact a distribution day, as suggested would likely be the case in Thursday’s note. All three major US equity indices lost ground - led lower by the Nasdaq which shed 0.92%. The S&P 500 and Dow Industrials both lost 0.33%. Volume predictably rose sharply as a result of quad-witching. The NYSE saw volume rise by 32.41%. The Nasdaq’s volume rose by 33.43%. The escalation in volume, coupled with negative price action has confirmed for investors that resistance at the 2100 level on the S&P 500 will likely remain for some time, unless of course there is a shift in themes that have come to dominate our recent headlines and trends.
As it is unlikely that we will see a surprise in economic data as Q2 closes out or that the Fed will alter the outlook for the economy in the near term, the shift that has the greatest potential to provide a reversal of fortunes for investors, and a trade higher in equities, resides with British voters. Clearly investors, here in the US and globally are concerned over the results of this Thursday’s referendum. If, as recent polls have indicated, British voters may vote to leave the EU, equity markets both here in the US and globally will slide lower. In that event, you can also safely expect a risk off trade that will push yields lower, and gold and volatility (VIX) higher. On the other hand, if voters elect to stay in the EU, equity markets around the globe will have a short term pop. However that pop higher will likely be short lived as the other headwinds outlined above remain in place.
Global equity markets have rallied and US stocks have closed substantially higher on Monday. The sudden interruption in trend is due in large part to most very recent polling suggesting that Britain will vote to remain in the EU. Public opinion in Britain has been impacted by last week’s murder of Jo Cox, a Labour Party law maker and advocate for remaining in the EU.
The economic calendar highlights include Janet Yellen speaking twice, housing/home sales data. petroleum inventories, Leading Indicators and Durable Goods.
Markets are in the hands of the Brexit vote. Vote aside, there is little to encourage investors to engage the market from the long side.