US equities point against “Brexit”

June 23, 2016
By Vlad Karpel

Stock index futures moved higher overnight along with European equities markets and stocks are now broadly higher into midday Thursday. The S&P 500 is up 20 points to 2105.45 and near session highs.

Treasury bonds have lost some of their recent “safety” bid as financial markets bet that Britain will remain part of the EU. The yield on the benchmark ten-year Treasury is moving up to 1.72% and well above the multi-month lows of 1.52% seen a week ago.

Gold lost $4.5 to $1265.50 and crude oil gained 30c to $49.50.

On Wall Street, Financials (XLF) are the market’s best gainers. Basic Materials (XLB), Telecomm (IYZ), and Energy (XLE) are seeing relative strength as well. Utilities (XLU) are the only losers among the ten market sectors that comprise the S&P 500.

CBOE Volatility Index (VIX) dropped 3.3 points to 17.87 into midday Thursday, but overall options volumes are not picking up substantially. Roughly 3.4 million calls and 2.7 million puts traded through the first two hours. Projected volume for the day is 14.5 million contracts and in-line with the one-month daily average.

SPDR 500 Trust (SPY) Jul 212.5 calls are the most actives with more than 156,000 contracts traded. IShares Emerging Markets Fund (EEM) Jul 35.5 and 36.5 calls have traded more than 110,000 contracts, driven by a large spread purchase. Cypress Semi (CY) Jul 11 calls are the most active single stock options with volume of 27,000 contracts.

Overall, investor focus remains on the macro rather than the micro. That’s because the earnings calendar is light and the “Brexit” vote in the UK is consuming a disproportional amount of the financial media coverage.

However, while the event certainly has a substantial amount of historical significance, a look at the data lately (volume and S&P 500 actual volatility), it seems to be having a rather minimal impact on the US equities market thus far.

Looking forward, domestic economic data will likely be the main driver amid a barrage of numbers between now and the July 8th monthly payroll report in two weeks. In this environment, the action in the Treasury bond pits will be worth watching after the roller coaster month of June. The chart below shows the recent ups and downs of the iShares Long-term Bond Fund (TLT), which holds a basket of Treasuries that mature in 20+ years and moves opposite to longer-term yields.

See Tradespoon’s Stock Forecast on iShares Long-Term Treasury Bond Fund (TLT)


Tradespoon’s Stock Forecast on iShares Long-Term Treasury Bond Fund (TLT)

Notice that TLT shares are falling towards three-week lows Thursday as bonds slip and stocks rally. The recent decline comes after a rally to new highs a little more than a week ago. Therefore, the recent trend suggests that stocks are rising along with falling Treasuries, higher yields.

In other words, the fears about the global economy that drove bonds higher and yields substantially lower last week are receding and the change in sentiment has helped the S&P 500 recapture the key 2100 level. Key technical levels to watch include previous resistance at 2100, which is likely to serve as support. 2096, 2086, and the 50-day moving average are also short-term support for the S&P 500. Resistance at current levels of 2105, as well as 2110 and 2115.

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