As rumors of a “Brexit” mounted, stocks rose Monday without any special catalyst besides a 6% gain in crude oil that followed the sort of vague rumors of potential production cuts that we have heard many times before.
Oil industry veterans that experienced the oil price slump in the 1980s believe that the current glut will last a lot longer than optimists hope, according to an article in Reuters. Reasons cited included quota cheating, reduced demand due to improving efficiency in Western countries and the impact of non-OPEC supply, such as the North Sea and U.S. shale.
Amos Hochstein of the U.S. State Department weighed in with doubts that the proposal to freeze crude production drafted by Russia and the Saudis will succeed. He argued that locking in production near historic highs “does not change an oversupplied market.” However, Russia’s oil minister stated that there is enough support to push a freeze deal through by March 1. Nigeria came out in support of the deal, so how can it miss.
Over in Europe came increasing concerns about the possibility that the United Kingdom will leave the European Union, a potential event that has come to be known as the “Brexit.” Prime Minister David Cameron called for a June 23 referendum after negotiating a reform deal that proposes special status for his country within the EU. Shortly after that announcement members of parliament from his own Tory party pledged to campaign for exit from the EU.
Boris Johnson, the popular mayor of London, also stated on Sunday that he would back Brexit. There has been a flurry of brokerage commentary on the issue, most of it surrounding the thought that Brexit is unlikely. However, many argue it will be a close call.
Concerns generated by a possible Brexit include the effect on the U.K. economy and assets, the impact on foreign bond buyers, foreign exchange depreciation and possible Bank of England action. Pound sterling was much weaker on the day, at one point trading down over 2% against the dollar to near seven year lows. Equities in London, however, rallied as much as 1.5%, which was partially attributable to strength in miners, to be fair.
Lifting sentiment a bit were hopes for a ceasefire in Syria. The U.S. and Russia have reportedly agreed to draft terms for a ceasefire in Syria, which would begin on Feb. 27. Reports suggest that Assad and the Syrian opposition alliance are ready to support the ceasefire. The ceasefire excludes attacks on ISIS and the Nusra Front, so I’m not sure what good that does.
As for economic milestones, the February flash manufacturing PMIs were weaker than expected. Japan saw the largest decline since April 2014 and reached the lowest level since June. Eurozone also fell from January and was below consensus. At the country level Germany disappointed. The U.S. Markit reading missed expectations, as well, after falling from prior month. The reading matched its lowest level since 2009. Sub-indices fell across the board. This is not good.
Bottom line is that stocks rose because sentiment lifted a bit, not for any special impulses from the news or improvements in the economy. With growth still tepid and expectations too high, it’s still fair to expect this rally to peter out before we reach the 2,000 level of the S&P 500.
This is a wishy-washy market that is mostly moving via waves of sentiment rather than changes in facts. One of the strategies I’m using to trade it is to look carefully at companies that are expected to report earnings in the next one or two days, and buy or short their stocks based on whether they are likely to go up or down sharply on the news.
The basic idea is that news about companies earnings tend to leak a little ahead of the report date, and those whiffs of success or disappointment tend to show up in the money flowing into or out of a stock both under the surface and in plain view. My analysis uncovers several stocks each day that are poised to move up ahead of their reports and several stocks that look to move down before reporting earnings. I’d like to share one of each with you now, along with my instructions.
Buy to open Blackhawk Network (HAWK) at the market price at 3:45 p.m. ET on Tuesday, Feb. 23.
Short (sell to open) Clean Harbors (CLH) at the market price at 3:45 p.m. ET on Tuesday, Feb. 23.
Exit both of these trades at the market price at 9:45 a.m. ET on Wednesday, Feb. 24.
Jon Markman writes a daily trading newsletter, Trader’s Advantage, and CounterPoint Options, a service geared towards helping individual traders make steady, consistent profits with the VIX. Follow him on Twitter for his latest take on markets and innovation.
