“Brexit” Aftermath

Stocks rebounded from two days of heavy selling and are sporting solid gains into midday Tuesday. After dropping 113 points Friday and Monday, the S&P 500 is up 20.29 to 2020.83.

Strength across European equity markets set the table for the morning advance on Wall Street. Crude oil is also higher, gaining 92c to $47.25. Gold has lost some of its “safety” bid and is down $7 to $1318.

Telecomm (IYZ), Energy (XLE), and Healthcare (XLV) are pacing the advance on Wall Street.

Treasury bonds are holding two days of big gains despite better than expected Consumer Confidence and GDP numbers Tuesday. The yield on the benchmark ten-year remains at just 1.46% and probing the historic lows seen four years ago.

Trading in the options market is active, but well off the pace seen Friday and Monday. Roughly 3.6 million calls and 3.6 million puts traded across the exchanges in the first two hours of Tuesday’s session. Projected volume for the day is 16.8 million and 8% greater than the one-month daily average, but also well below Monday’s 22.4 million contracts.

Bank of America (BAC) November 16-strike calls are the most actives of the day with more than 105,000 contracts changing hands. IShares Emerging Markets Fund (EEM) May 27 puts, SPDR 500 Trust (SPY) Aug 190 puts, and SPY Jul 180 puts are the next most actives.

The interest in SPY short-term puts Tuesday morning is not terribly surprising given the uptick in market volatility lately. Sometimes called the “Spiders”, the exchange-traded fund holds the same stocks as the S&P 500 Index and is also market value-weighted. Therefore, shares of large US companies dominate the ETF and portfolio managers often buy SPY puts to hedge portfolios during times of market turmoil.

And the two-day market decline did a fair amount of damage on the technical front. The chart below shows the steep fall in the S&P 500 Friday and the break below mid-June lows and the 50-day moving average. The tumble also erased the index’s year-to-date gains.

See Tradespoon’s Stock Forecast on S&P 500 (GSPC)

Tradespoon’s Stock Forecast on S&P 500 (GSPC)

Monday’s decline was equally negative as it caused the S&P 500 to break below 2000 intraday and also fall below its 200-day moving average.

In the short-term, the S&P 500 seems to have held support at 2000 and is again testing its 200-day moving average. CBOE Volatility Index (VIX) is down another 4.08 points to 19.77 after a notable decline Monday. The two-day drop comes after a nearly 50% surge Friday.

Nevertheless, the decline in VIX and the slower trading volumes in the options market Tuesday suggest that “Brexit” fears are receding a bit and a sense of normalcy is returning to financial markets. Barring any unusual moves in the currency markets, the next catalysts for the S&P 500 might now shift to domestic economic data as the calendar is chock full of reports between now and monthly payroll numbers on July 8th. Personal Income/Spending, Pending Home Sales, and Crude Oil Inventories due Wednesday morning.

In addition to 2000, the S&P 500 has support at 2015 and 1991. The 200-day moving average, 2020, 2031 and 2037 are areas of short-term resistance.