Yesterday I posted about the potential for a technical breakdown on the FXI and PGJ charts. I am operating under the assumption that China is the global engine right now. Further, if China is weak I am assuming that the US markets will be weak too. How I do arrive at making this conclusion?
I could make many arguments, but the most straightforward argument is that the top momentum stocks (think 52 week high list and IBD 100) are ADRs from China. So if the bulk of our top performers are going to selloff, what is going to replace those stocks? The big boys will get hit by a weak China too. Most of the large cap stocks all have a China story behind them. If the direct investments in China are weak, expect weakness in the large cap stocks with China exposure too. So if China ADRs and large caps (also hurt by a rising dollar) are weak, it may be difficult to find technically sound stocks. And if you can’t find technically sound stocks, it means it is not a good time to buy stocks.
In the pre-market, FXI is currently trading at $38.50. After two days of consolidation around the 200 DMA and horizontal support, a 3% move down would solidly bust the index technically. I still expect that there will be a fight and that it won’t a straight ride down to $32, but if FXI does breakdown today I generally don’t want to own stocks.
The story behind the weakness in China appears to be a restriction on lending.
Several Chinese banks have ordered some branches to suspend new lending for the rest of this month, people familiar with the situation said on Tuesday, as concerns rippled around markets in the region that China may take more aggressive action to rein in bank credit that is fuelling the country’s rapid growth.
Source: Wall Street Journal
The problem with trading news is that it is very difficult to determine whether the news is really the catalyst behind a move and it is also difficult to determine whether the news is really material. Put another way, is the news minor and just an excuse for a selloff or is it highly material and a catalyst for a major turning point? That’s where technicals come in. We are seeing the cautionary news about China now, but we have been seeing China weakness since November. This is not a January move. China has been in retreat for 2-3 months.
I’m still watching, but I am getting closer to changing my allocation to 100%cash. It is way too early for me to talk about shorting stocks, but I’m getting close to pulling the plug on my remaining long positions.