You can say Monday was constructive, you can say it was just the start of more downside. Two days down for the indices, hard on Friday, not quite as hard Monday in some cases.
As for a 'typical' sharp selloff related to a specific item the market has a hard time valuing in terms of impact, this is indeed constructive. Many times a market sells off late week, sells again early week, then finds some kind of bottom. Perhaps just a relief move that bounces back to gap points or resistance then fails, perhaps a move that goes farther and actually puts in higher highs. When you have a specific event like the Brexit, that is often bought aggressively once investors come to grips with initial unknowns.
Right now that is still the unknown. Investors Monday still wrestled with what the Brexit means. S&P jumped in and downgraded the UK to AA from AAA; getting in front of the curve I suppose, but it seems to me S&P is not factoring in the UK being free from the yoke of mindless regulation. Still, it hasn't bounced yet, and frankly you don't really even know the indices will bounce.
Sentiment remains quite negative listening to the financial stations, but then again, a lot of the people on those stations, not all but a lot, are the establishment types and this kind of rejection of the power structure causes them angst. There is a lot of 'lost faith in central banks,' 'we don't know where it can go from here,' never seen this before' hand-wringing on the air. Plenty of pessimism.
Ironically, VIX was lower, falling almost 10% after the Friday surge to near the January/February closing highs. Fear spiked then faded on more selling. That suggests volatility traders do not see this as a long term event for the stock market.
That, of course, did not help the upside to start the week.
SP500 -36.87, -1.81%
NASDAQ -113.54, -2.41%
DJ30 -260.51, -1.50%
SP400 -2.81%
RUTX -3.36%
SOX -4.01%
VOLUME: NYSE -50%, NASDAQ -29%
A/D: NYSE -4.3:1; NASDAQ -5.7:1. Still a good downside licking taking place as stocks of all sizes get slapped around.
Growth was obviously slammed in the uncertainty while utilities and the like moved higher, providing a bit of lift for the large cap indices. Leadership, including oil, chips, software, steel, biotechs all sold hard. Financial stocks continued to drop. Again, the utilities, deep discount retail, stodgy drug (e.g. JNJ) were up. Not your long ball hitters.
On the charts, DJ30, SP500, RUTX broke the 200 day SMA while SP400 and SOX held theirs. NASDAQ, well, it broke the 200 day last week and didn't improve on the day.
The action around the 200 day SMA after two sharp days lower is interesting. The holds are good for a bounce, and often you see a rebound to at least test the breach of that level even if the indices are going to sell more. That could mean at least a better exit point if they bounce but run out of gas, or even more upside if the market gets a handle on the Brexit issue.
What will it be? Relief move or more? Not sure yet. The market has that 21 month top it is working on and Brexit rattled it down from near the highs in the top. The economic data remains crappy (Dallas Fed PMI -18.3, contracting again) despite some strange disconnect where people believe things are great.
I heard one fellow on an Austin radio station saying sure there were 'pockets' in the US where things were bad, but most everywhere else you work hard, you become a success. The irony (yes another one) is that HE is in a pocket of prosperity in Austin while much of the US is suffering. The rules have changed, literally, with the tens upon tens of thousands of new regulations, new taxes, new health insurance requirements, etc. It is not enough just to work hard, work smart, and great things follow. As the Dallas Fed PMI respondents showed, the economy is not healthy, the ACA and other regulations are stifling them, and if something doesn't change, they go out of business. But, I digress.
The data is overall bad in the areas that really show the economic impact and the market top has reasserted its dominance. At this juncture, while VIX is lower and suggests a shorter duration of this Brexit-related event, you have to assume the downside is in control, and thus any bounce is a relief move that fails. So, use a relief move to exit positions when they run out of upside bounce and enter more downside at the same point.
As of Monday, only selling ruled. Still has not tried to bounce, but again, that is normal in this kind of event: weak close to the week, more selling to start the week, more at the start of Tuesday and then, perhaps, the market is near term oversold and tries that bounce move. One step at a time.
We took some gain on some downside positions, leaving plenty to continue working. Also picked up some NVDA puts. Many current upside positions were down for sure but were at the next support either in a moving average, Fibonacci retracement. We will see if they can make that bounce and at least provide a better exit after the gaps lower.
Have a great evening!
Jon Johnson, Chief Market Strategist
InvestmentHouse.com
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