The “Plunge” after the “Last Rally”

Investor’s first read – Daily edge before the open
DJIA: 18,011
S&P 500: 2,223
Nasdaq Comp.4,910:
Russell 2000: 1,1.72c
Friday, June 24, 2016 9:09 a.m.
I really expected the “stay” to win, but warned a “leave” vote would result in a gap down at the open, most likely leading to a slide into October.
I had my headline already written in the event the Brits opted to stay in the EU – “Defer Purchase – Trader’s Sell” to warn readers to sell into a surge in prices at the open if the stays won.
The disruption to world markets is already significant, the extent going forward is not known at this point. Governments will scramble to implement damage control, as they are faced with months of uncertainty.
I believe this will be the “plunge” I referred to in my May 25, “Last Rally Before a Plunge” blog.
The ongoing risk now is, will any other country opt to leave the EU ?
The EU is no stranger to crises. It barely survived the sovereign debt crisis in late 2009 and years after when Greece, Portugal, Spain, Ireland, and Cyprus were on the ropes.
In any event, it will take the Brits two years to exit the EU entirely, they can always rejoin if they wish.
Markets tend to continue in a state of vulnerability until something triggers a break. This may well be the break. The U.S. markets have been fundamentally and technically overpriced for over a year, propped by a Fed policy that encouraged the Street to opt for risk assets without regard for other considerations – the economy, the uncertainty of the November election, and domestic global economies.
Financial news will blister in coming weeks with reports of repercussions of the Brit vote. The EU will be quick to say the break won’t hurt. The Fed will try to sugarcoat it with suggestions it will go easy on any tightening measures.
These comments will draw investors back in running the market up only to fall back again.
The vote surprised the Street which was bullish running stocks up sharply at yesterday’s close. Some traders will use the gap down to buy, smart money will sell if stocks rebound sharply today in an attempt to “close the gap.”
Don’t buy the government hype in coming months. This market needs adjust to a reality that includes the reality that our economy and bull market is seven years old and vulnerable and faced with major uncertainties.
Fed governors will be out in force next week to play down the Brit’s decision to opt out – IGNORE THEM !
I expect sharp rebounds to be followed by sharp selloffs as the Street reacts to optimists and pessimists as they pitch their case.
Serious disruption has taken place here.
The EURO STOXX opened 11% lower the German DAX 10% down. The British pound had its worst day ever, down 7.2%, Oil down 4.1%, the FTSE down 4.2%, but gold was up 4.8%.
Central banks have stepped in to head off carnage.
Circuit breakers have been tripped across the board so the open on the NYSE
May be worse than known before the open.
Rallies are for nimble traders and offer an opportunity for investors to raise some cash in line with their tolerance for risk. If the market were down prior to this announcement I would be less bearish, but it was up and overpriced – vulnerable.
SUPPORT “today”: DJIA:17,327 ; S&P 500:2,027 ; Nasdaq Comp.: 4,723 .
On occasion, I technically analyze each of the 30 DJIA stocks for a reasonable risk, a more extreme risk, and an upside potential over the near-term. I add the results of each, then divide by the new DJIA “divisor” (0.14602) to get the DJIA for those levels. This gives me an internal check on the DJIA itself, especially if certain higher priced stocks are distorting the averages.
As of June 17, 2016, a reasonable risk is 17,518 a more extreme risk is 17,388. Near-term upside potential is 17,901.Support here is being tested.
(I will repeat this regularly to keep readers aware of the potential for an April correction)
The market is tracking a pattern for presidential election years where an administration is in its second term.* The news is bad.
Historically, these markets have declined in Jan./Feb., rallied in March then topped out in early April, plunged in May with brief rallies in June and August and a plunge into October prior to the election.
 STATUS OF MARKET: Neutral – but very, very vulnerable. Expect volatility
 OPPORTUNITY: RISK: Risk high, Profit taking justified.
 CASH RESERVE: 45%. Consider 75% now if tolerance for risk is low.
 KEY FACTORS: Outlook for Q2, and 2016 earnings questionable. Fed has market under its spell.
Note: Source of weekly economic calendar and good recap of indicators:
George Brooks
Investor’s first read
A Game-On Analysis, LLC publication
Investor’s first read, is a Game-On Analysis, LLC publication for which George Brooks is sole owner, manager and writer. Neither Game-On Analysis, LLC, nor George Brooks is registered as an investment advisor. Ideas expressed herein are the opinions of the writer, are for informational purposes, and are not to serve as the sole basis for any investment decision. References to specific securities should not be construed as particularized or as investment advice as recommendations that you or any investors purchase or sell these securities on their own account. Readers are expected to assume full responsibility for conducting their own research pursuant to investment in keeping with their tolerance for risk.

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