Wednesday, May 4, 2016

Brexit Selling

I think what you may be seeing in the coming weeks is selling ahead of that Brexit vote in late June.  I know it is fundamentally meaningless.  The U.K. has its own currency, and is a member of the EU mostly in name only.  But the media and by extension the financial community, are pushing this as an economic event, even though it is not.

So I find it quite odd that there is all this mention of Brexit as if it is a market risk.  I was even asked about it earlier this year, and I told the person it doesn't mean anything.  He was shocked at my response.  What you will see is investors sell and lighten up their holdings ahead of the event, and then buy them back, regardless of outcome, after the event.  So what you see is pullback in risk assets ahead of the event, and then a rally after the event and uncertainty is removed.

But this time, there are reasons to sell this market, at this time, other than Brexit.  The main reason being equity valuations and the lack of earnings growth.  That is the fundamental basis for the weakness.  You add a little fear and uncertainty and that just provides more fuel for the fire.

Usually the first decent pullback after a big up move is bought, but that is for your typical market.  That hasn't happened as often over the past 2 years.  It is a very herd like market, so you tend to go straight up with very few pullbacks, like we had from Feb to April, and then you tend to go straight down like you had last August and in  January.  So buying dips is more dangerous, when you have a market that is this heavy, overvalued, and plunge prone.  However, for a small trade, it is worth it to risk a small amount and buy this dip towards SPX 2040 and target a move to SPX 2070.  If we get an afternoon selloff down towards SPX 2040, I will be willing to start buying for a quick trade.


shzhning said...

Can you please share how many trades do you average per week?


Market Owl said...

around 5

MM111 said...

Are you still waiting/hoping for SPY 2040?

Market Owl said...

Cancel it. It is not worth it to buy dips here, just too weak of a market and too dangerous. Better to just short rallies now. That is the game plan for this. Will look to short the next one or two day rally. It might not happen till we go down to SPX 2020.