All Brexit All the Time

It is fascinating to see the sole emphasis of the global markets on Brexit, like it is the key to the future of the global economy.  It is actually quite reassuring to me from a longer term view.   I know my edge is still there when I see this kind of irrationality.  This kind of market behavior.  It reinforces what I believed all along:  deep down, most investors and traders are herd animals, even if they say they are contrarian.

Sure, no one in the investment community likes to admit that they are part of the sheep herd, but these media induced frenzies like Brexit or Grexit are grabbed on to like they are linchpins for the global financial system.  These story lines are treated like they are fact, when they are just massively popular opinions and conjectures.  They lead to overreactions on the downside and the upside based on how the event is projected to play out.  We got a big change in opinion over the past weekend that Bremain is much more likely based on the opinion polls.  If you looked at the odds makers, they were always giving a bigger probability to Bremain, despite the poll numbers saying the opposite.

When the polls and betting odds run counter to each other, I always favor the accuracy of the betting odds.  People who put their money on the line will always be more accurate than results of any polls.  That goes for Brexit, as well as the bond market predicting the number of future Fed rate hikes much more accurately than the Fed's own rate hike projections.

So we had investors jumping the gun yesterday, believing that no Brexit is pretty much in the bag, rallying stocks and selling bonds.  This is your basic front running ahead of an expected event.  It doesn't mean I expect a sell the news reaction, but it just makes me more confident that the day after the Brexit resolution will probably be a top that can be shorted.  I have noticed a lot of complacency during the last pullback, even though there is nothing to really like here about the stock market.  With the stock buyback window closed and mediocre earnings lined up for the middle of July, there should be a bunch of profit takers lined up to sell any kind of no Brexit pop.  I think next week you get back to market weakness.

However, unlike what many think, I actually believe the volatility will start to get more serious after the no Brexit event is over, because the market has reached buying saturation, which I could see in the investor position and higher call volume before we got before last week's pullback.  Don't forget the equity meltup and TINA talk that we had by pundits on CNBC just 2 short weeks ago.

I am still short, and will likely keep the position unless there is a dip down to the SPX 2070 level.