Please Note: Blog posts are not selected, edited or screened by Seeking Alpha editors.

The Best Little Central Bankers In The World

|Includes: SPDR S&P 500 Trust ETF (SPY)

Good afternoon readers,

This market letter was first emailed to subscribers on Saturday - to become a subscriber please go to millersmusings.com and sign up, or click here to subscribe. It's always free. And you'll get the notes as they are published. This one got stuck in the SA editing process and so I'm publishing it just as a Instablog instead. Sorry for the delay!

Boys, I got myself a pretty good bullshit detector, and I can tell when somebody's peeing on my boots and telling me it's a rainstorm.

Ed Earl, The Best Little Whorehouse in Texas

As you may have heard, the British decided to have their own Independence Day on Thursday. "Leave" voters are being derided by the press and the losing side as ignorant, foolish, intolerant, xenophobic - and those are the nice things. I call B.S. The Leave voters are none of these things. They are just tired of being told that the EU is going to save them, when in reality most of the issues in the EU economies can be chalked up to an over-reaching regulatory state. The EU isn't working. The economies in it have been eviscerated over the past decade by the very institutions that the Remain people are now saying Britain needs. Needs why? As I heard one hardworking gentlemen state on BBC World News today (I know he's hard working because he was interviewed while literally unloading a truck - how many of the posh bureaucrats in Brussels have ever worked a truck you think?) - "Great Britain has been around for a very, very long time, and we'll be just fine." Good for him - he's right.

Am I saying that Brexit won't have an impact on the British economy? No. I'm saying I don't know what the impact will be, but staying in the EU wasn't going to be good. So after a long period of being tied to stagnating, at best, economies on the Continent, leaving to give it a go on their own isn't so crazy. Think about it. The EU is a morass of poor performing economies - some of the worst in the world - led by career bureaucrats who think that the answer to every problem is more regulation, more government, more centralization of power, more Central Bank meddling in the economy. And despite the fact that it has produced absolutely horrible growth (if there is any real growth at all), despite the fact that innovation outside of a few Nordic countries is basically non-existent in the EU (can someone point me to their Silicon Valley? No? Didn't think so), despite the fact that the ECB has had to push rates negative across Europe in a blind leap of faith that maybe that will work where nothing else has, despite all this, it's just crazy for Britain to say, eh, screw it, we'll give this a try on our own. Who's the crazy one? I'd say all those folks crying wolf that the EU is the only alternative. Because piss ain't rain.

Don't feel sorry for me. I started out poor, and I worked my way up to outcast.

Miss Mona, The Best Little Whorehouse in Texas

Oh, by the way, did you notice that the "uneducated masses" who voted for Leave managed to do what the "genius" PH.D.s running the central banks in Japan and Brussels have been trying to do for years without success? They devalued their currency, and didn't tank their stock market. That's right, the "crash" in the Sterling (and Sterling is just back to where it was on February 26, 2016 by the way) is exactly what Draghi and Aso have been trying without success to do to the Euro and the Yen. When they do it, it's called monetary policy. When the Leave campaign does it, it's called a disaster. Okey dokey. Want to know which major stock market performed the best on Friday? (Asian markets closed before Leave vote was confirmed.) Great Britain's. And it was up on the week. Nice trick, that. So despite all the wailing about how this will be a disaster for Britain, the people who actually have to bet with their money disagree. I'd follow the money.

They want me to close her down, run her out of town. How can I ask her to leave when all I want her to do is stay?

Ed Earl, The Best Little Whorehouse in Texas

In fact, if you follow the money, Brexit isn't bad for Britain - it's bad for the EU. Check out those Italian and Spanish returns - they are the worst one day returns in the history of their markets. Apparently, some folks were expecting the British to take on some of the problems of Italy and Spain. Quoting Spiro Agnew, the "nattering nabobs of negativism" are talking their book - which is long all the bad loans on the Continent. Economically speaking, outside of losing some, but nowhere near all, finance jobs that must be done within the EU per regulation, this will prove to be a net benefit in the long run for Britain. It's getting rid of the dead weight that is dragging down all the economies of the EU. It's putting behind it the stagnation and regulation that's killing innovation. One of the arguments for Remain was that leaving will require the unanimous agreement of the other 27 countries to any of the terms. I'd say that's a great argument for Leave…(ever try to get 27 people to agree to anything? It's not a good way to manage a continent.) What are three of the strongest countries in Europe? Norway, Iceland, and Switzerland (you can throw in Liechtenstein if you want as well). None are in the EU.

Now I'm not saying there won't be some issues to work out. Visa-free travel and the freedom to work anywhere in the EU were nice - but also part of the problem. At the end of the day, more than half of the British people decided that "you know what, I don't travel that much, and I want to stay and work in the town where I live now, so those things aren't that important to me." They are important to the two groups that mainly voted to Remain - the young, and the international set in London. If you're used to hopping over to Paris for a quick meeting, going through customs will be a bit of a drag. Welcome to the rest of the world. If you're young and were hoping to spend a few years just roaming around the continent, working a bit here, loafing a bit there, well, you can't anymore, and that sucks. But that's the way democracy works sometimes, and lots of folks decided that unrestrained immigration from the Middle East wasn't a thing they wanted to support. Besides, Britain never really wanted to be a part of the EU in the first place. Just watch this video for (funny) proof.

The border between Ireland and Northern Ireland will be an issue. Right now, it's open border, but not long ago it was a militarized flash point that cost many, many lives. Going back to that won't be good, and solving the Irish issue won't be easy. To me, this is the biggest looming problem from a societal standpoint, and I'm not sure what the right solution will be. Belfast is still a divided place, and could quickly devolve into violence. Hope isn't a strategy, but it's all we have there at the moment.

Ed Earl, I think the best thing to do is to put this behind us, just as quick as we can. I've made a little money, I've laughed some, I've danced to the music…it's just time to pay the fiddler, that's all.

Miss Mona, The Best Little Whorehouse in Texas

So back to the markets, which is the focus of this letter. In the U.S., the SPX closed right on its lows (it traded lower Thursday night, but not during the daytime session), but the session was fairly devoid of panic until the closing minutes. Trader lore is that markets never bottom on a Friday, as investors have all weekend to read the worried cognoscenti's dire predictions (tip: ignore them). Markets usually start to put in a bottom on the morning of day 3 after a shock, as that's when forced sellers (aka, those with margin calls) and those who invest via model portfolios get out. Technically, stocks behaved as expected - the SPY bounced right off the support we noted in our last letter at 204/205, before breaking down at the end of the day and settling at 202. There is a little support about 1% lower at 200, but if we follow the risk-off playbook from January we could be heading back to 190 over the next week and 185 if things get ugly. For now, I'd continue to play defense and stay well hedged. In the last letter, I said "Lots of smart investors are saying markets are at unsustainably high levels and are preparing for a selloff. Bill Gross warned of a bond market "supernova". Soros is taking down his firm's equity exposure and buying gold. Same for Druckenmiller. At John Mauldin's recent Strategic Investor Conference, the speakers were almost all uniformly bearish." Turns out they might be right. This selloff is pretty minor so far for the overall market - we're just back to where we were in mid-May. But I don't think it's over just yet.

If you're inclined to go shopping, I'd look at the U.S. regional banks, which have been just crushed - some were down over 10% on Friday alone, despite having zero exposure to Europe. The ones down the most suffer from a combination of asset sensitivity (they make more money when rates are higher) and exposure to oil. The outlook for both is now lower for longer, as the strong dollar makes raising rates difficult for the Fed, and the strong dollar makes oil cheaper here in the U.S. So the flight to safety trade by macro funds has hit the smaller regional banks in the Western United States. Welcome to investing, circa 2016. We're all connected. And we're not even in the EU.

__________________________________________________________________________

This week's Trading Rules are repeats, since they are appropriate in this environment:

§ It isn't what you worry about that hurts your portfolio. It's what you know for sure.

§ Managing risk, chaos, and probability is what separates the successful traders from the losing ones. Take baby steps.

The broader market has been performing worse than the S&P 500, as utilities and staples hold up the index. Tech and financials have been especially weak lately. I'd go shopping there for bargains if you have a time frame longer than a week. Financials are being hurt by the prospect of "lower for longer" again in the U.S. and weirdness from negative rates abroad. Tech is being hurt by weak global growth outlooks, but the best businesses will be fine, especially those with a U.S. focus.

SPY Trading Levels: The market was coloring within the lines until Friday. The SPY stopped just at the big resistance level of 209/210 before the Friday fall.

Resistance is now 206, 208, 210 and 212. Lots of overhead.

Support: small at 202 and 200, a decent amount at 194/195, then 188/190. After that 184/185.

Positions: Long and short U.S. stocks, ETFs and options. Neutral stock exposure, net short down 1%.

Miller's Market Musings is a free bi-weekly market commentary written by Jeffrey Miller, who has been managing money through various market environments for over 20 years. You can subscribe here. If you no longer wish to receive this letter, simply hit reply and put "Remove" in the subject line. Prior posts can be found at www.millersmusings.com.

Mr. Miller has been quoted in financial publications including the Wall Street Journal and New York Times, and he has appeared on Fox Business News, PBS and CNBC. More information and past articles can be found at www.StockResearch.net. Sharing and quoting from this letter is permitted with attribution.

Millers Market Musings and StockResearch.net are not making an offering for any investment. It represents only the opinions of Jeffrey Miller and those that he interviews. Any views expressed are provided for informational and entertainment purposes only and should not be construed in any way as an offer, an endorsement, or inducement to invest and is not in any way a testimony for Miller's other firms. Jeffrey Miller is a Partner at Eight Bridges Capital Management and a Member of Eight Bridges Partners, LLC. Eight Bridges Capital Management, LLC is an exempt reporting advisor with the SEC. Eight Bridges Capital Management solely manages the Eight Bridges Partners, LP investment fund and does not provide any advice to individual investors in any capacity.

Any views expressed herein are provided for informational purposes only and should not be construed in any way as an offer, an endorsement, or inducement to invest with any manager, fund, or program mentioned here or elsewhere. Any opinions about any individual stocks, commodities, or other securities expressed in this article or any linked articles or websites are solely for informational purposes only and are not an offer or inducement to buy or sell any securities. The author and/or funds he manages may hold positions in the securities mentioned and his positions may change at any time without an obligation to update this disclosure.

All material presented herein is believed to be reliable but we cannot attest to its accuracy. Opinions expressed in these reports may change without prior notice. Jeffrey Miller and/or funds he manages may or may not have investments in any securities cited above as well as economic interest. Jeffrey Miller can be reached at 503-333-9725 or jmiller@stockresearch.net.

Disclosure: I am/we are short SPY.