U.S. equities pushed higher on Thursday, awaiting the results from the historic Brexit referendum in the United Kingdom — a vote on whether the country will be the first to leave the European Union.
While the “Leave” campaign enjoyed some momentum a few weeks ago, the murder of a Pro-“Remain” MP reversed the dynamic. While pre-vote polling was close, remain appears the most likely outcome. Markets are responding accordingly, with the pound sterling at its highest level versus the dollar in six months. Reports that global central banks and financial ministers are prepared to act to soothe markets has bolstered sentiment as well.
In the end, the Dow Jones Industrial Average gained 1.3%, the S&P 500 Index gained 1.3%, the Nasdaq Composite gained 1.6% and the Russell 2000 gained 2%. Treasury bonds were weaker, the dollar was weaker, gold lost 0.5% and oil gained 2%.
Financial stocks led the way with a 2.1% gain, a move that was justified by the release of solid “stress test” results in the afternoon.
Energy and materials were also strong. Marathon Oil Corporation (NYSE:MRO) pushed further away from its three-month resistance level near $15 — lifting the July $15 calls recommended to Edge Pro subscribers to a 26%-plus gain since recommended on Tuesday.
BlackBerry Ltd (NASDAQ:BBRY) gained 3.9% despite a big revenue miss on hardware weakness as investors focused on good earnings and better margins. Southwest Airlines Co (NYSE:LUV) fell 1.7% after announcing it would delay $1.9 billion in spending on new 737 Max 8 aircraft amid evidence of industry overcapacity and profitability challenges.
Brexit polls closed at 5 p.m. EST and the first results are due around 7:30 p.m. But it won’t be until around 9 p.m. and 10 p.m. before a clear sense of direction in the voting results will be known. Both currency and stock markets have already priced in a Remain victory.
But with stocks on the verge of breaking out to fresh highs for the first time in more than a year, I wouldn’t be surprised by a surge up and over Dow 18,000 on the removal of this big macroeconomic unknown. This should be enough to keep the low volume, narrow breadth, short squeeze dynamic that’s been lifting stocks alive until the Independence Day holiday weekend.
After that, seasonality and the approach of the second-quarter earnings season should result in fresh weakening. Moreover, the bulls have been ignoring lingering issues like the specter of Federal Reserve rate hikes (assuming job growth remains strong), a contentious 2016 U.S. presidential election, uneven economic data and Chinese currency volatility. All of these catalysts haven’t gone anywhere.
In short, the sideways directionless market dynamic that’s been in place for the last three years probably has a few more months to go before we see any significant medium-term move. And I believe that move, based on falling corporate profitability and evidence of nascent inflationary pressure (which will force the Fed to hike), will be to the downside.
Anthony Mirhaydari is founder of the Edge and Edge Pro investment advisory newsletters. A two-week and four-week free trial offer has been extended to InvestorPlace readers.
