"Trying to predict the future is like trying to drive down a country road at night with no lights while looking out the back window."
-- Peter Drucker
For the third time in 2016, pundits incorrectly predicted the reaction to a vote. Once again, the victory of the populist position was supposed to cause market pressure, but instead indices are sharply higher after some initial weakness.
The Italian constitutional vote that took place yesterday and resulted in the resignation of Prime Minister Renzi was supposed to cause uncertainty and make the country less competitive internationally. It was basically the same reason for which the market was supposed to sell off on the Brexit vote and the Trump Election.
Perhaps the pundits are correct that these three events are fundamental negatives, but that isn't deterring the buyers. They want to buy, despite the hand-wringing of the geniuses that are convinced that those votes are products of racially tinged populists that have no idea what is in their own self-interest.
The reaction to the Italy vote isn't nearly as surprising as what happened after the Brexit and Trump votes. In this case the "no" vote had been well ahead in the polls for a while and the market had been anticipating the event correctly. In addition, the European Central Bank made it clear that they were ready to act should there be some negative fallout from this vote.
This is creating a "buy the negative news" reaction this morning, with the U.S. market primed to gap up strongly to start the week.
This move follows a very chaotic week, which had many market players concerned that the Trump rally was running out of steam. There was a massive reverse rotation last week out of technology and biotech and into financials and oils. Oils were driven by the OPEC decision and banks by continued pressure on bonds ( (TLT) ).
The DJIA managed a slight gain last week while the Nasdaq 100 (QQQ) suffered a significant loss of 2.6% as the FANG names such as Action Alerts PLUS charity portfolio name Facebook (FB) and Growth Seeker's Amazon (AMZN) where hit hard, along with the semiconductor sector ( (SMH) ).
Early indications are for a sizable bounce to start the day, but the key to navigating this action will be figuring out the rotation. Oil is indicated higher again and technology names are active, but this is a market that has been running on sector themes and they are extremely confused right now.
If this rally is going to have legs, then it's the technology names that need to lead. Many of the key names have suffered technical damage and are due for bounces, but it will take some work to restore luster to the FANG names and the technology group.
The themes that drove the Trump rally, which include infrastructure, steel and biotechnology, have slowed but are still holding up well. Whether there is another leg up in those themes following already substantial moves is questionable, but momentum has a way of going further than you might think.
A gap up open on Monday caused by a "buy the bad news" reaction doesn't make for easy chasing, but that is what we need to deal with. Stay patient and don't force entries.