Brexit: The Day After

As we suspected following the dramatic plunge in markets over the previous two sessions a bounce was likely. On Tuesday, stocks showed a bounce back to the upside, but nowhere reaching sufficient gains to even measure as an offset to the huge losses. This kind of bounce is often referred to as a “dead cat bounce”, suggesting that after such dramatic selling even a dead cat will bounce from such a high fall.

The major indexes finished the day near the highs of the day. The Dow surged up 269 points (+1.6%) to 17,410, the Nasdaq soared 97 points (+2.1%) to 4,692 and the S&P 500 jumped 36 points (+1.8%) to 2,036. The NYSE finished at +1.88% and the small cap Russell 2000 at +1.62%.

Overseas, the Asia-Pacific region turned in another mixed performance. Japan’s Nikkei 225 Index crept up by 0.1 percent, while Hong Kong’s Hang Seng Index edged down by 0.3 percent. China’s Shanghai Index was up by 0.6 percent.

Meanwhile, the major European markets all moved sharply higher on the day. While the German DAX Index surged up by 1.9 percent, the U.K.’s FTSE 100 Index and the French CAC 40 Index both soared by 2.6 percent.

The media explanation of today’s bounce on Wall Street was that traders were motivated to pick up “discounted” stock positions as bargains. I say most of this bounce was simply computerized buying as stocks across the board had broken down below the 50 and 200-day moving averages, where many of these trading programs have been tweaked to automatically buy.

Traders and fund managers who were caught unawares of the Brexit Sell-Off will watch this bounce carefully. If it starts to weaken in the next day or so then they will jump on the opportunity to book their losses at a smaller level, leading to another volatile selling spree.

Volatility is the winner following the Brexit vote. But this is a type of volatility that is hard to predict on a day to day basis. We remain convinced that going forward this summer in particular, we will see dramatic sell-offs and dramatic rallies as the overall markets continue to decline in a jagged path downward.

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