End of Day Update:
Tuesday was a tough day for the S&P500 as it gave back most of Monday’s gains. We fell back under the 50dma and 2,100 support, but managed to hold the 200dma. Volume was slightly above average, but relatively constrained given the size of the decline.
The Chinese government surprised everyone with an unprecedented yuan devaluation. This sent investors the world over scrambling for cover. While there is a direct impact from a weaker yuan and stronger dollar, that pales in comparison to the inflamed fears of a slowing Chinese economy.
The market can quantify and digest currency moves in a day or two. This is a negative for export dependent economies like Germany, but a weaker yuan actually helps net importers like the United States since it lower input costs for many of our companies. That’s why stocks like WMT were higher when everything else was down.
Reacting to the currency move alone, the response in US markets seemed overblown. But it wasn’t the currency move that spooked traders. They feared the reasons the Chinese government felt compelled to act so brashly. Between slowing Chinese growth, a crashing Chinese stock market, and now this, traders are starting to fear worse than expected weakness in the world’s second largest economy.
This situation leaves the market in a precarious position. Prices defied countless bearish headlines this year from Grexit to rate hikes, but those were largely recycled stories that we’ve lived with for years. China weakness on the other hand is something new and unexpected. Investors that weren’t bothered by a Grexit or 0.25% rate hike are rightfully concerned by these Chinese headlines. While there is a good chance this is just another blip on our way higher, this is the most serious situation we faced all year.
Things are too uncertain at the moment to predict which direction the market will go next, but I’m confident whatever happens, it will be dramatic. Maybe this is what finally breaks the camel’s back and triggers the long-awaited correction. However, if a crumbling Chinese economy cannot bring down this market, then nothing will and all we can do is hang on and enjoy the ride. The next couple of days will give us good insight into the market’s psyche. Either selling intensifies and we plunge to levels not seen in years. Or the emotional selling exhausts itself and we rebound to new highs like we have so many other times.
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Jani Ziedins (pronounced Ya-nee) is a full-time investor and writer who has successfully traded stocks and options for more than a decade. He earned a B.S. in Mechanical Engineering from the Colorado School of Mines and an MBA and M.S. Marketing from the University of Colorado Denver. His prior professional experience includes manufacturing engineering at Fortune 500 companies, structural engineering, small business consultant, collegiate instructor, and managing investment real estate. He is now fortunate enough to trade full-time from home, affording him the luxury of spending extra time with his wife and two young children.