Weekly Update

July 1, 2016 Update

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Charting the Brexit damage – outside of Europe

We might as well start where we left off last week. Then, we pointed out that the Dow Jones Industrial Average (DJIA) remained within its trading range despite the Brexit plunge. Monday’s trade this week punctured that pretty picture by dropping the DJIA below the line we drew thus heralding a change in market tone from kind of, sort of, maybe bullish to more of an unhappy view. By week’s end, however, the tone had dramatically flipped back as if the Brexit vote never happened.

Earlier in the week we wrote the following: we opine that this Brexit business is just a lot of noise for now. For fundamentally-driven investors, it should represent a marginally decent buying opportunity (I mean some European airline stocks are down -20% in two days!). After all, the road to Brexit is as long as two years with the “winners” in Britain already walking back their promises to voters (e.g. “you mean we actually won this thing? What do we do now?”). Britain could well end with trade agreements not much different than are already in place. Unlikely that the stock market is going to be all that focused on the laborious process of hammering out new trade deals. In the interim, there will be new elections in the UK and maybe another shot by the Scots to depart the UK. After all, Scotland voted “remain” across the board. Regardless, markets are emotional beings, especially in the short-term when a scent of fear pervades.

Our focus Nasdaq 100 (QQQ) index initially became somewhat sickly breaking down out of a three-months-long effort coiling up to give new highs another shot. However, once down below support and in a sort of technical no-man’s land, roared back.

Chart 1: Nasdaq 100 roars back

Nasdaq 100 roars back

The possibility of a snapback was perhaps in the offing as the small-cap Russell 2000 index stopped its fall at support, having been down 4 weeks in a row (5 straight down weeks for the Nasdaq we note). This action might have encouraged buyers to step in.

Chart 2: Small-caps hold on to support

Small-caps hold on to support

Also positive has been the modest uptrend staged by commodities through the first half of 2016. This coincides with a decline in the U.S. dollar as we’ve pointed out before.

Chart 4: Commodities trending upward after a long decline

Commodities trending upward after a long decline

If this upturn can hold after years of bearish behavior, it should eventually be a plus for emerging market stocks. So far, the emerging markets keep knocking on the door of a break higher but have yet to bust through. Chartologists will note the very clear head and shoulders pattern forming here. A break above 35-36 should be worth some solid upside.

Chart 3: Emerging markets working on a big move upward?

Emerging markets working on a big move upward?

While Brexit damaged European, and to a lesser extent U.S., stock markets, the recovery was equally robust. There are signs of future strength in emerging markets and commodities as long as the U.S. dollar doesn’t push markedly higher from here. We thought there was a good chance the Brexit shock would dissipate as a long, drawn out process between Britain and the EU goes forward. There is a reasonable likelihood that British Parliament finds some way to keep the current trade setup largely in place so that real impacts are very limited from the referendum. In the U.S. earnings are expected to resume their growth after several quarters of decline related to the slump in energy prices and related share values.

An update on the DJIA

Only fair with the update above that we also bring current last week’s chart on the Dow Jones Industrial Average. It doesn’t look quite as good this week. A weekly close below 17000 would be more concerning.

Chart 5: Dow Industrial update

Dow Industrial update

Market Update

Investors began the week with a continuation of Friday’s post-Brexit selloff. Banks took the heaviest hit while investors fled to safe havens. The U.S. dollar rose +1% as a part of the flight to safety. Stocks ended lower by -1.8% adding to Friday’s more than -3% slide. Tuesday brought a complete about-face with stocks recovering their Monday losses on little new information. The change in tone carried over into Wednesday with stocks adding another +1.7% despite generally negative Brexit posturing from Fed governors and a hardline stance toward Britain from European Union leaders. European and English central banks suggested readiness for further monetary easing to offset Brexit concerns Thursday.
This fueled additional rallying in stocks with indexes closing the volatile month of June with a +1.4% gain. The 3-day rally brought U.S. stocks completely back to their pre-Brexit starting point and logged the 9th strongest 3-day tally in market history. Friday began the month of July in a show of more strength albeit somewhat muted as the market appeared tired after its torrid surge of the prior three days.

Warm wishes and until next week.