Brexit to Shift the Market

June 16, 2016
By Vlad Karpel

Stocks remain mired in a bearish funk through midday Thursday. The S&P 500 is down 12.81 points to 2058.69 and on track for a sixth consecutive day of losses.

Treasury bonds are higher, however, after the Federal Reserve concluded a meeting Wednesday afternoon and signaled no change to monetary policy. The yield on the benchmark ten-year, which moves opposite to the price of the Ten-Year Treasury, is falling towards 1.5% for the first time since late-2012.

Crude oil dropped $1.56 to $46.45, but gold gained $24 to $1312.

Energy (XLE) is the weakest sector on Wall Street as crude oil extends recent losses. Financials (XLF), Industrials (XLI) and Tech (XLK) are also under water. Utilities (XLU) and Telecomm (IYZ) are the only gainers.

CBOE Volatility Index (.VIX) resumed its recent surge and is up 1.80 to 21.94. Trading in the options market is running at its fastest pace so far in June, with a notable uptick in put activity driving a lot of the flow. Roughly 4 million calls and 5 million puts traded across the exchanges. Projected volume for the day is almost 20 million and well above the one-month daily average, which is now 14.5 million contracts.

VIX Aug 20 puts are the most actives with 74,000 contracts changing hands. SPDR 500 Trust (SPY) Jun 207 calls, SPY Jun 205 puts, and SPY Jun 204 puts are the next most actives Thursday.

Friday is a quarterly “Quad Witch” expiration with futures, futures options, single stock futures, and equity options expiring and therefore active trading is likely to continue into the weekend.

After that, some earnings will be in focus early next week as FedEx (FDX), Adobe (ADBE) and a couple of homebuilders report results. Outside of housing and durable goods data, the economic calendar is light until the final week of June.

However, the media focus will likely remain on the June 23rd vote on whether the UK should exit the EU. Recent polls show the “Leave” movement gathering some momentum and, if successful, could potentially impact financial markets through falling EU currencies and an increase in risk premiums due to a heightened sense of economic uncertainty. The chart below shows the US-listed iShares United Kingdom ETF (EWU) being pummeled in recent days ahead of the vote.

See Tradespoon’s Stock Forecast for US-listed iShares United Kingdom ETF (EWU)



Support at current levels around 2050,

Tradespoon’s Stock Forecast for US-listed iShares United Kingdom ETF (EWU)

An apparently bearish development, with the 50-day crossing over the 200-day moving averages to form the “death cross”, appears on the chart. Meanwhile, support levels for the ETF, which holds shares of leading companies that trade on UK’s stock exchanges, is likely around $15, $14.80, and $14.2. Resistance at $15.20, $15.40 and $15.60.

As for the S&P 500, bulls will likely wait to see the index end its losing skid before sticking their necks out too far, but the high put volume and spike in the VIX suggest somewhat oversold market conditions. 2050, 2044, and 2040 are short-term support levels for the S&P 500. Expect resistance at 2060, 2075, and 2086.

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