Stock Market Early Morning Insights – June 24, 2016

At the close of the cash market yesterday, it appeared that the major market indexes were well on their way to pushing toward new highs. With the Brexit vote, obviously all of that is changed. There’s no need to rehash what happened yesterday in the stock market, because it is irrelevant.

This is a problem with trading on anticipated news events. Yesterday the assumption was that Great Britain would choose to stay within the European Union, but surprisingly, because the polls were wrong again, the vote was 52% to 48% to leave the EU. David Cameron has resigned as Prime Minister, and Scotland is threatening to take another vote for independence. The Scots were heavily in favor of staying within the EU as was Northern Ireland. This could roil world markets for quite some time, but nobody knows.

Overnight trading in the E-mini futures has been hectic and volatile. The E-mini’s traded all the way down to 1999 and are currently trading at 2026 as I write this at 6:30 AM. It looks like the financial world is falling apart, but in reality, the E-mini futures are at the same level they were one month ago. Asian and European markets were hammered along with the Euro, and gold futures spike to new highs. The Nikkei close down 7.92%, and the DAX is currently off 7.37%. More E-mini futures traded overnight than traded all of yesterday.

I noticed yesterday that even with the strong advancing versus declining line, volume was less than normal for both the E-mini’s, the NASDAQ composite, and the S&P 600 small-cap index. Volume was above average for the S&P 400 mid-cap index. All of the indexes had very strong candles and closed in the upper part of their daily ranges. The strong closes obviously have been negated with the overnight action.

The VIX is currently up 42% from yesterday’s close which means that option premium, especially the puts, are extremely expensive. Yesterday going into the close, premium had been sucked out of puts because of the strong close, and anybody that had foresight to buy puts of the close, will make a lot of money at today’s open. Some uninformed traders will more than likely buy puts at the open, which is a huge mistake because of the inflated premiums, but option sellers should make out unless the market totally collapses.

If you have stops in place, you need to be aware of this. Stops become market orders if a stock opens below your hard stop. If the opening bids set by the market makers are below your stops, you will get filled at the bid.

You could change your stop to a stop limit order, but if a stock does not trade back up to your designated stop area, you will not be filled. Your other option is to remove the stop before the market opens, and hope your stocks find support.

I only have a few positions on because of market uncertainty, so I will remove my stops pre-market, see where the stocks are trading after the opening rotation, and then make a decision. If prices are well below my stops, and it does not look like they are finding support, I will close the positions. If they are still trading above my stops, I will re-establish the stops. Nobody said trading stocks is not a dangerous proposition.

Yesterday was a remarkable day with everything looking extremely positive. Every one of the top 100 stocks contained in the major market indexes was up yesterday. The SOX had 30 advancers, and no decliners. The S&P 500 had a ratio of 12.59 advancers for every decliner. All of the optimism at the close has obviously evaporated.

As I said above, the E-mini futures are currently trading where they were one month ago. This is not a market meltdown yet, but capital preservation and risk control are the keys. I expect we’ll see a complete reversal of yesterday’s advance decline line with the exception of precious metals and gold stocks. Oil is getting hit hard this morning, bond futures are out to a new high; fear is palpable based upon the frenetic trading that I am seeing in the E-mini’s.

Fortunes were made and lost overnight, but this is an extremely fast market, and it is probably best to manage your current positions, and step away. If you would really love to own a stock, and it trades options, sell the puts to collect elevated premium rather than buying the stock. If at expiration, the stock is trading below the strike price, you will have to buy the stock, but you will have a nice cushion. If the stock goes up, you will not own it, but you keep the premium. This is how Warren Buffett has acquired much of a stock over the years. Personally, I’ll probably just take the day off to see what happens going into the weekend. This is no time to try to be a hero..

STOCK MARKET EARLY MORNING INSIGHTS

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