Thoughts {07.09.15}

Markets are on track to erase most of yesterday's losses.  We've had a bunch of risk on, risk off days recently which have amounted in our markets to a lot of churning about.  Markets are now over sold enough that probability suggests something of a more sustainable bounce at least in the short term.

Much ink {especially from me} has been spilled regarding Greece and it seems that the markets are just now waking up to the better than 30% decline in China.  First thing we should point out is that China's markets are up over 5% as of this writing.  The 2nd is that most of their decline has to do with Chinese A. shares.  These are shares that mostly trade in China and until recently investors outside of China could not invest in these.  In the context of these A. shares I give you this from Chart of the Day.com {this is their free chart-rest are behind a paywall}.

This chart shows the Shanghai Composite Index.  The first thing you should note is that better than 30% decline in the past month or so.  The 2nd is that this index went up something like 150% in the past year!  Taking a look at this market in this light makes a 30-50% pullback look somewhat understandable.  The issue from my understanding is that there's an awful lot of small investors who've bought near the top and are facing significant losses magnified by margin.  That's a disaster for those people and also for the Chinese government for letting it happen.  The other side of the coin is that the investors who bought earlier this year is still sitting on some handsome profits.  

I mentioned above there's a higher probability that US stocks are oversold in the short term enough so that a bounce of more than a day or so might be forthcoming.  While markets are looking in the green prior to today's opening, probability also suggests that we'll have to get through any Greek or other foreign related headlines over the weekend for a rally to pick up steam.  US stocks have bent in the past few weeks but have never quite broken.  For all the recent negative chatter, the S&P 500 is down less than 2% year-to-date.  That is hardly bear market territory.  It seems that each time that it looks like momentum is gaining on the downside something comes in to save the market.   I've had a shopping list together of ETFs I'd like to put in client accounts and it seems that each time I think these are going to get into a buying range, the market rallies.  It has been frustrating to not be able to execute a strategy but in this kind of volatility it is better to stay disciplined.  We will have to see if we get that kind of opportunity going forward.  This kind of focused approach has not hurt us in a year where markets have basically gone nowhere.   

We should point out that while probability suggests that markets have the potential to rally in the short term, markets have some headwinds to work through in the coming months.  Many of these like Greece and China are foreign related.  However, we still need to see how the US economy fared in the 2nd quarter and what are domestic expectations for the rest of the year.  In particular we will need to see how investors respond to earnings.  Then we will have to again focus on whether the Federal Reserve is going to raise interest rates in September.  Also we can't discount something occurring overseas.  It is amazing how many foreign crises begin in the summer months and come to a head in the autumn.  Finally there are market seasonal factors for us to work through.  Much of Wall Street is going to be at the beach between now and Labor Day and that has the potential to magnify small problems into something larger.  Some of these issues could be mitigated by the fact that the economy is probably doing OK right now.  I am not saying that markets are going to have a correction because I don't know.  I am saying we need to be aware of the possibility of rougher sailing in the next few months.

Back Wednesday next week unless something comes up where I feel the need to break in.

*Long ETFs related to the S&P 500 in client and personal accounts.  Long ETFs related to China in certain client strategies and in personal accounts.  Positions can change at any time without notice.