For the remainder of the summer I will be taking Friday off from writing these notes in order to put together the weekly methods update. The pictures for Asset Class Overview and Sector Watch will be put up and watch list additions will be added over the weekends.
Asset Class Overview
Morningstar Legacy Sectors:
So far, in June, equity indexes have been driven almost exclusively by the UK referendum on whether or not to exit the EU. The decision to leave caused one of the largest one-day sell offs since 2011. Down momentum normally takes time to dissipate. A lower low is likely still ahead.
Sell offs caused by a shock event like this tend to bottom and then reverse rather quickly. That is likely now as well as investors realize that the non-binding vote will have little material affect within the next year or two, if ever. Moreover, several studies related to extremes in volatility and sentiment suggest US equities are nearing a point where a reversal higher is very likely.
The referendum is a non-economic shock. The vote is non-binding. The UK may or may not begin a 2-3 year process of renegotiating its treaties with the EU. Politicians in the UK are already walking back their intent to leave the EU. From a practical standpoint, the referendum represents uncertainty but changes little any time this year or next year (from Capital Economics).
Non-economic shocks tend to leave minimal damage to stock indices. In a study of 51 geopolitical shocks complied by Ned Davis, US equities gained more than 6% in the following year (read more here). Similarly, in a study of 14 non-economic shocks since WWII, S&P Capital found that US indices bottomed within 6 days and had regained all of the losses within 2 weeks (read more here).
All this being said, some long term moving averages are beginning to flatten out indicating a potential for a top in the making.
However, let’s not get ahead of ourselves, carry on, follow your plan and well, just carry on!