China is really falling apart!
The Shanghai Stock Exchange dropped another 3.5% today to finish well-below 3,000 at 2,900 – ending at the low of the day. That puts the index officially in bear market terrory (again), now 20.5% off it's December 22nd high of 3,651. The latest fall in China’s stock market followed a state-run media report that some Chinese banks were no longer accepting stocks as collateral for loans. At the same time, official data also showed weak demand for bank loans.
It doesn't matter if it's true or not – what matters is people are in the mood to panic – so it doesn't take very much to start a stampede – as we saw yesterday when our own markets stampeded up for the same no reasone they stampeded down the day before and now our Futures are down 1.5% on a combination of China concerns and now the 5% drop in oil we're seeing as that sector panics over Monday's release of Iranian oil – which will add about 500,000 barrels a day of unneeded oil to the already saturated markets.
We extensively discussed oil and other commodies in Tuesday's Live Webinar for our Members (replay available here) and I explained why it was not done going down at the time, so I won't re-hash it here but we are finally getting to the point where we might take a long poke on the Ultra-Bullish Oil ETF (UCO), which is now under $8, not much below USO, which is now under $9. We'll keep an eye on that in our Live Member Chat Room next week.
Speaking of keeping an eye on things – you are very welcome for yesterday's call to go long the Russell at the 1,000 line (and yes, we did it again this morning). One of the huge benefits to having cash on the sidelines is we have plenty of margin left over to play the Futures and make these quick in and out trades – without having to risk the overnights.
And thank goodness we didn't risk the overnights because the Russell has round-tripped all the way back to 1,000 this morning and, since we're not too proud to double-dip – we went long again at that line! This time, we'll expect a smaller gain because we may be consolidating for a big move down now. With China officially in a bear market along with the European Indexes (from their April highs) – if we don't get more than a weak bounce by early next week – we could be looking at another 5-10% leg down before we find support (see yesterday's notes).
Of course, we may be a bit too fixated on China, as it was this low and much lower last fall while our S&P obliviously climbed to the 2,100 line into the Holidays. No one was worried about China then (we'll, we were – but no one listened) so this is more about oil than China this morning. Oil is truly catastrophic but the news of Iranian production adding another 500,000 barrels a day next week is only news to people who don't follow the market – we've been talking about it for months.
Taking that into account, our downside target for oil is and has been $25-27.50 and, while it may go a bit lower as the suckers panic – that's the level at which we'll begin easing into some long positions. No hurry, of course, especially as it's now almost 9am and the Dow futures are down 400 points (995 on /TF) on the release of a disappointing data:
- December Retail Sales: -0.1% M/M vs. +0.1% expected, +0.4% prior.
- Core Retail Sales -0.1% M/M vs. +0.2% expected, +0.3% prior.
- Dec. Producer Price Index: –0.2% M/M vs. -0.1% consensus, +0.3% previous.
- Core PPI +0.1% M/M in-line with consensus, +0.3% prior.
- January Empire State Survey: -19.37 vs. -4 consensus, -6.21 prior
These are all very, very bad numbers so nothing to get bullish about here but it is options expiration day so anything can happen and probably will. 4,124 was the low on Nasdaq Futures (/NQ) yesterday and, if that breaks – then I'll be seriously worried and we'll watch the $96 line on Apple (AAPL) to see if that holds. If so, we may take some bullish pokes like we did yesteray – favoring the Russell (/TF) as it crossess back over 1,000 with tight stops below.
Hopefully, we'll recover a bit into the close but, if not, we'll be setting targets as much as 10% lower by Monday.
Try to have a nice weekend,
– Phil
