Well Britain did it. They voted to leave the EU and the market took a beating. Most investors were completely blindsided as many polls in the last few days showed a clear remain victory. This event was a real shock to the markets in every sense of the word. The gap on SPY is one of the largest we have ever seen, and this means there are a lot of trapped bulls. As we mentioned last week, we were waiting for the dust to settle so that we can pick up the pieces.
This week we expect a lower low but we should still see a nice bounce as early as Monday, but more likely by Wednesday. We would like to see some more down first to get our indicators even more extreme to make a buy a safer trade because bears do have room to run. Normally, any bounce will then be sold and we should see another Bear leg down.
As we have mentioned over the last few weeks, Bulls would have one more chance to breakout to new highs before the Bears get the ball back. The run up into Thursday fulfilled this call with Bulls failing yet again, and now Bears clearly have the ball. However, Bears are not out of the woods yet. Even with the large drop on Friday, we are still technically in the smaller of the two ranges. By definition, bulls still have a chance until the bears have a decisive breakout (which would be below the May low). Once that is broken, we should quickly see the red 197 target.
We are also entering another blackout period which will be a headwind for bulls.
Speaking of headwinds, in reality the Brexit vote does not change much in the immediate future (the shock to the market, is the real issue), but now there is another major headwind to an aging bull market. The major players will milk this for all that it is worth. There will be big rallies and falls based on future Brexit news (and other exit rumors) which we will constantly keep and eye on.
Historically, shocks like this end up being great buy opportunities, but this one has occurred near an all time high, and during an old bull market so we need to keep that in perspective. Off the record, if we do see the bullmarket come to an end this year Brexit gives the big boys a scapegoat – the British people.
In reality, we think the major market mover over the next few months will end up being the next few job reports. If we start to go negative we think that will be the dagger on the fundamental side to kill the bull market.
Long-Term Market Outlook (Updated 4/17/16).
On the long-term chart, July is a very critical month. If June closes near the low of the month and July closes below Junes low, this will signal a big warning for major funds and they will begin to unload long term positions. On the flip side, if July reverses June’s losses this will be seen as extremely bullish.
We have a relatively slow week on the calendar compared to the last few. This will allow the market to digest Brexit. The highlight this week will be the Speech by Yellen on Wednesday. The futures market now has a very low chance of another rate hike in 2016 and even a small chance of a cut. The Fed looks completely lost and that adds yet another bearish headwind.
The June Jobs report will be on July 8th due to the holiday.
Trend Following Models:
My long term models are Bullish.
My medium term models are Bearish.
My short term models are Bearish.