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Stay in or stay out? How Brexit is confusing traders

A supporter of the "Britain Stronger IN Europe" campaigns in the lead up to the EU referendum at Holborn in London, Britain June 20, 2016.
Luke Macgregor | Reuters
A supporter of the "Britain Stronger IN Europe" campaigns in the lead up to the EU referendum at Holborn in London, Britain June 20, 2016.

Stay in or stay out?

That was the initial issue for the Brexit vote, but now it's more complicated. The market has gyrated so much that traders are no longer sure how much the market might move, regardless of whether the public votes to stay or remain in the European Union (EU).

I said on Thursday that the markets had sold off so much on exit concerns that the risk then was to the upside. That is, the market was going a long way toward pricing in a Brexit already. The pain trade (the trade that would cause the greatest amount of pain to active market participants) was therefore higher, because everyone was starting to position for the likelihood of an exit.

What a difference two trading days make. The FTSE has risen nearly 5 percent from its bottom on Thursday as the polls have shown stronger support for remaining in the EU following the murder of British MP Jo Cox. Even the S&P 500 Index has staged a notable turnaround: It bottomed on Thursday at 2,050 and has moved nearly 50 points (about 2.5 percent) in two trading sessions.

As a result, the game has reversed. The risk is now to the downside. That is, it's likely that at least part of the rally we would have had this Friday had the UK voted to stay in Europe has taken place today.

As a result, the pain trade is now to the downside: Because the markets have moved away from the likelihood of an exit, the greatest surprise to the markets would be if the vote went in favor of an exit.

But how much more upside is there? It's not clear, but there certainly seems some modest upside in Europe, and if you look at the volatility levels in the U.S., there's a good chance we get another rally Friday if the vote is to stay in the EU. The CBOE Volatility Index got above 22 on this scare, going from 14 to 22. We are at 17 today.

This implies there is still money on the sidelines that could be put to work. Would it be enough to climb over the 2,131 historic high in the S&P 500? Not clear.

Of course, this could all reverse tomorrow. Sit tight, we could have one more scare left!

Makes you long to get back to worries about slow global growth and negative yields. Which we will—next week.

  • Bob Pisani

    A CNBC reporter since 1990, Bob Pisani covers Wall Street from the floor of the New York Stock Exchange.

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