WASHINGTON. It was high time for a summer swoon after the Dow’s and S&P 500’s recent highs. The trailer-teaser showed up last week as the selling turned nasty. But a weekend’s worth of headline risk put Mr Market into vampire mode. And this morning, aided and abetted by our New China Syndrome, the worsening US-China trade war, Mr Market plunged his newly-revealed fangs into stocks. And as we write this, the blood continues to run on Wall Street as stocks crash. Big time.
You could see signs that this convincing market crash was on its way some 2-6 weeks ago. We prepared by selling off weaker parts of our portfolios this summer. But should have paid more attention and acted more aggressively on the sell side each time the New China Syndrome worsened. As stocks kept tickling new peaks this summer, markets generally looked tired and unconvincing. The McClellan Oscillator (below, as of COB Friday, August 2) kept hitting successively lower peaks before correcting ever lower. Again and again. That was not a good sign.
Monday’s sickening market action
As of 10:50 a.m. ET Monday, the Dow continues to head lower in waves. Having just passed the -600 point marker post (a -2.3 percent loss) the Dow could head even lower before the end of the trading day as we continue to watch stocks crash.
The S&P 500 action is equally ugly. That broader-based average is currently off 66+ points for a 2.25 percent loss.
And the tech-heavy NASDAQ is getting pounded worst of all, even after the beating Mr Market administered this average last week. Today, the Nazz is off some 231 point, a whopping loss of nearly 3 percent on the day thus far. The horror! The horror!
The New China Syndrome plot sickens
Things could get even worse as this week winds on. We’ll likely get a nastier negative reading on the McClellan Oscillator after today’s close. And the VIX – a good measure of stock volatility, typically reflecting a market on its way down (though not always) – spiked hard last week as you can see on the August 2 COB VIX chart below. The VIX, too, may spike higher today. We’ll have to see. If it does, it’s not a good sign.
Note: Both charts courtesy Stockcharts.com, a technical analysis service to which we subscribe.
The NASDAQ’s recent performance in particular is very likely tied to the current international trade edition of the New China Syndrome. As we watch tech stocks crash in particular, we need to realize that many tech companies and manufacturers are deeply involved investing in China. Something that may now work against them double-plus bad.
An exasperated President Trump, against the advice of his financial advisors, (or so we read), threatened to slap a 10 percent tariff on remaining Chinese exports to the US that we hadn’t already hit. Suddenly, we find, this morning, that the Chinese yuan has magically been devalued. Another pie fight has begun. And tech stocks crash worse by the minute as a result. Along with pretty much everything else.
The Chinese advantage over Trump: Their people know what will happen if they rebel
Used to laughing at a string of patsy US Presidents when it came to ignoring unfair Chinese trade practices, the Chi-com government is seriously pissed at our current President. Media to the contrary, Trump stands up for American companies, American patents and trade secrets, American know-how, and, even more importantly, for preserving American jobs and encouraging more of them. The Chinese don’t like this one bit. They prefer their enemies to be lazy and compliant.
On one hand, the Chinese economy is currently more fragile than ours. On the other hand, the Chinese government can tell any rebellious citizens that if food and product shortages materialize and if wages suddenly get reduced, they’d best not protest. They’ll be advised instead to take privation and like it, and just suck it up for China. Or else. Like they’ll probably do with those uppity ingrates in Hong Kong fairly soon.
Trump can’t revert to dictator mode here in the US, at least not at present. (We’ll have to leave that up to an eventual “Democratic-Socialist” successor.) If things get bad enough over here, well, the voters will just throw that pesky Trump out of office in Election 2020. Increasingly, it seems that’s what the Chinese government has decided to do. Just mess up both economies (even if they mess theirs up more), and rely on reactive American democracy to finish the job of replacing the current, uncooperative US president. It’s a long game. Unfortunately, Americans traditionally don’t play long games very successfully.
New China Syndrome: An increasing risk for US investors
But the New China Syndrome – the slowly escalating US-China trade war – has become a real burden for US stocks, given the potential damage to the next round of quarterly corporate numbers and the possibility that the amazing job growth under President Trump could come to a screeching halt. This is what’s primarily behind the constant headline risk that’s been sucking all the air out of stocks even as they rose in June and, furtively, in July.
But now, things have turned even nastier, and Mr Market has recently turned predator. Serious headline risk just adds more fuel to the fire as American stocks crash.
We’ll see how things go today – likely not too well – and then decide whether to reduce weakening positions yet again. That’s not always a good idea, as you can miss the next strong rebound. Even if it turns out to be a dead cat bounce. But then again, we may not see a “strong rebound” for months. Meaning it might be a good time to take a break and hide out in bond ETFs/funds, utilities or purchased money market funds.
What’s an investor to do?
We’ve actually gambled a bit this morning, upping our positions somewhat in badly beaten but still promising names like Amazon.com (trading symbol: AMZN); Microsoft (MSFT) – which is holding up fairly nicely this morning, all things considered; AT&T (T); and our substantial positions in preferred stocks, which, happily haven’t budged much this morning, or have even gone up in some cases.
Bottom line: This is just a horrible morning. And it’s likely to become a horrible afternoon. Markets might recover a bit late in the day. But then again, some new headline might panic them again.
And the continuing fake news surrounding this weekend’s pair of mass murders in El Paso and Dayton will find soulless Democrats using it as another excuse to disarm the Deplorables. They don’t give a damn about the victims. Only gun control. And it shows. All of which will have an indirect but still corrosive effect on US markets. A corrosive effect that serves to amplify the deepening China Syndrome mess.
Add the increasing likelihood of a “hard Brexit” this fall, and we could have one hell of a hard time avoiding a massacre by Wall Street’s eager bears.
–Headline image: Bela Lugosi as Dracula. Image is in the public domain, obtained via Wikimedia.
Slightly edited to fit our CDN format.