On Friday, stocks closed higher for the fourth consecutive day, almost completely wiping out the post-Brexit losses. Volume fell to its lowest level since before the referendum sparked a global market sell-off.
But the recovery in stocks doesn’t change the fact that risks remain. A reasonable withdrawal of Britain from the European Union may take months to engineer. On Friday, the European Central Bank’s top economist warned the Brexit could have an adverse impact on the European economy.
Bond yields have fallen to new lows with the benchmark 10-year U.S. Treasury note hitting a record intraday low on Friday before reversing back to close at 1.46%.
Gold closed down 1.4% at $1,339 an ounce on weak Chinese economic data, but it is up around 25% for the year. (See the Trade of the Day.)
Currencies are still in turmoil, led by the British pound, which closed at $1.328. The euro fell to $1.11. Some smaller U.K. exporters will benefit from the weakness, while importers like automakers and pharmaceutical manufacturers could face a decline in profits.
At Friday’s close, the Dow Jones Industrial Average gained 19 points at 17,949, the S&P 500 rose 4 points to 2,103, the Nasdaq added 20 points at 4,863, and the Russell 2000 was up 5 points at 1,157.
The NYSE Composite’s primary exchange traded 856 million shares with total volume of 3.4 billion. The Nasdaq crossed 1.7 billion shares. Block trades on the NYSE fell to 4,943 from 6,275 on Thursday.
For the week, the Dow and S&P 500 rose 3.2%, the Nasdaq gained 3.3%, and the Russell 2000 advanced 2.6%. Year to date, the Dow is up 3%, the S&P 500 is ahead by 2.9%, the Nasdaq is off 2.9%, and the Russell 2000 has gained 1.8%.
There are several positives in the chart of the Dow Jones Transportation Average, including a close above the resistance line at 7,465. The MACD indicator is also close to a buy signal.
But despite low fuel prices, the index has underperformed the industrials and the other major indices. There is also resistance from Friday’s close at 7,558 to the bearish resistance line at 7,900 to the double-top at 8,110.
An expanded chart of the Dow Jones Industrial Average shows that despite last week’s much-heralded advance, the index failed to exceed the pre-Brexit high at 18,011, made on June 23. The fact that volume favors the sellers does not help the near-term trend, while long-term charts still indicate that there are a host of potential sellers between Friday’s close and the Dow’s all-time high at 18,351, made on May 19, 2015.
Conclusion
With the transports still in an intermediate downtrend and the industrials yet to exceed the pre-Brexit close at 18,011, the Dow indices are still neutral at best.
The economic future of Europe and the U.K. is in doubt, so until the overhead of potential sellers is overcome, I remain neutral and suggest using rallies to increase cash positions.
Today’s Trading Landscape
To see a list of the companies reporting earnings today, click here.
For a list of this week’s economic reports due out, click here.
