Watch For Volatility Late Thursday As Investors Position Ahead Of Brexit Results

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Includes: DIA, IWM, QQQ, SPY
by: JJ Kinahan

Summary

The final vote tally is expected by about 2 a.m. ET Friday morning, but markets could get some indication on where voters stand perhaps by late in the trading day.

A remain vote is expected to be bullish for the stock market and a “leave” vote could be bearish, mainly because investors dislike uncertainty.

Another thing to watch today is at 4:30 p.m. ET, when the Fed is scheduled to release results of its “stress test” for 33 banks.

The long awaited "Brexit" vote is underway, and judging from the positive early market tone around the world, there's a sense Britain might choose to stay in the European Union.

The final vote tally is expected by about 2 a.m. ET Friday morning, but markets could get some indication on where voters stand perhaps by late in today's U.S. trading day, partly due to possible exit polling, and even some early voting numbers. Late-day volatility could be worth watching as many investors will likely try to protect themselves from any possible ramifications of a "leave" vote.

A remain vote is expected to be bullish for the stock market and a "leave" vote could be bearish, mainly because investors dislike uncertainty. A "stay" vote means status quo, which investors understand. A "leave" vote represents the unknown, and when people are unsure, they tend to sell. Early Thursday, stock markets around the world moved sharply higher as the idea took hold that voters might choose to stay. This appeared based on late polling that showed a rise to just above 50% for "remain" votes. Obviously it's too early to make predictions, but the markets often prove correct in circumstances like this.

CBOE VIX futures, which measure market volatility, had climbed above 20 at times on Wednesday, but fell back below 19 early Thursday. Generally, a VIX reading of 20 or more indicates a high level of fear in the markets. There was a major late-day rally in the VIX on Wednesday, so stay tuned late Thursday to see if VIX rallies again as investors seek last-minute protection prior to Brexit results.

In one sign that investors might expect a "stay" vote, the pound sterling rose early Thursday to new 2016 highs above $1.48. This sort of trade seemed to indicate investors being more sanguine about the prospects for a Brexit, but some analysts warned not to get complacent, and predicted as much as a 20% drop in the pound should a "leave" vote win the day.

Even if British voters do decide to leave, it's important to keep things in perspective. A "leave" vote doesn't mean Britain is immediately cast out of the European Union and left to sail on its own. The referendum simply sets the process in motion, and it could be years before any changes occur in Britain's trading status. It would, however, be a psychological blow to the idea of economic union, and perhaps create expectations that other European Union countries might decide to take the same step. But as for immediate ramifications, it's hard to say, in part because no country has ever left the E.U.

Besides Brexit, another thing to watch today is at 4:30 p.m. ET, when the Fed is scheduled to release results of its "stress test" for 33 banks. New home sales are due at 10 a.m. ET after yesterday's strong existing home sales report. Consensus is for new home sales at a seasonally adjusted annual rate of 560,000 in May, down from 619,000 the prior month, according to Briefing.com. April new home sales were the highest since early 2008.

U.S. weekly jobless claims came in at 259,000 on Thursday, below consensus of 270,000.

From a technical perspective, the S&P 500 Index (SPX) tested resistance at 2100 around midday Wednesday and then fell back. Resistance above that is seen near 2115, and key support is at around 2040, a level the index has bounced off of several times since March.

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Figure 1: Key Resistance Holds Ahead of Brexit: The S&P 500 (SPX), plotted here through Wednesday on the TD Ameritrade thinkorswim® platform, took a stab at key 2100 resistance Wednesday around midday but then fell back amid Brexit concerns. Source: Standard & Poor's. For illustrative purposes only. Past performance does not guarantee future results.

Yellen Hopes May Jobs Report Was Outlier: In her second day of testimony before Congress Wednesday, Fed Chair Janet Yellen addressed a question that could be on many minds: Was the May jobs report, with its surprisingly weak addition of just 38,000 jobs, a one-time event or the sign of something more dramatic happening in the economy? Yellen said that the weak report is likely to be transitory, according to media reports, and may reflect earlier weakness in economic growth. The economy seems to be picking up in the 2Q, she added, and she's "hopeful" job growth will pick up as well. We'll learn more when the June jobs report comes out on July 8. Thinking ahead to that, it's helpful to remember that a strike in May by Verizon (VZN) workers may have been partially to blame for the disappointing headline jobs figure. But in the months after previous Verizon strikes in 2011 and 2000, job growth rebounded strongly. Could a repeat be in the offing?

FedEx Delivers: FedEx (NYSE:FDX), considered a bellwether of U.S. economic activity, posted what analysts called solid 4Q sales and earnings. But it gave a subdued outlook for U.S. economic growth this year, dialing down its previous expectations. In a conference call with analysts, the company said it expects the U.S. economy to grow at a rate of 1.8% in 2016, below its previous forecast of 2.2%, Reuters reported. FedEx said it expects consumer spending to help U.S. economic growth rise to 2.4% in 2017. While FedEx still helps provide a solid view into U.S. economic activity based on the nature of its business, some analysts warn that the growth of e-commerce may make FedEx less of a "canary in the coal mine" than it used to be.

Home Cooking: Sometimes economic indicators surprise. Other times, they come in just as one might suspect, and Wednesday's existing home sales data appeared to be the second type. U.S. 30-year mortgage rates fell to three-year lows this week down around 3.54%, and on Wednesday the government reported a 1.8% rise in existing home sales for May. That put existing home sales at an annual pace of 5.53 million units, the highest since February 2007. Lawrence Yun, Chief Economist at the National Association of Realtors, noted that sales rose in May for the third consecutive month, and added that low mortgage rates aren't the only reason. "This spring's sustained period of ultra-low mortgage rates has certainly been a worthy incentive to buy a home, but the primary driver in the increase in sales is more homeowners realizing the equity they've accumulated in recent years and finally deciding to trade-up or downsize," he said in a press release. Yun predicted continued solid health for the home market. "Barring further deceleration in job growth that could ultimately temper demand from these repeat buyers, sales have the potential to mostly maintain their current pace through the summer," he said.

TD Ameritrade® commentary for educational purposes only. Member SIPC.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.