Break In-Today's Decline

A few quick thoughts as we watch stocks take it on the chin today.

Investors have been caught offsides the past few days and traders are therefore adjusting their portfolios based on three negative and unexpected pieces of recent news.  First, markets started declining in the middle of last week when the Federal Reserve indicated that they were done when they lowered interest rates by a quarter of a point.  Investors had hoped they would indicate this was a beginning of a cycle of lower rates for the economy instead of the one off inoculation as it's been portrayed.

The next two events are related.  The President on Thursday indicated he would put tariffs on the remaining $300 billion of imports coming from China that had so far been exempt.  Last night the Chinese retaliated by allowing their currency to fall below a key metric, thereby in theory making their exports more attractive on foreign markets.  China has portrayed itself recently as angry and hurt by the American actions.  This plays well internally in China.  It may also largely have to do with the internal crisis roiling Hong Kong at the moment.  In my view, China's patience with Hong Kong is almost gone and unless the tensions there are eased very soon we could see an intervention by the Chinese into Hong Kong. That move, should it occur, would likely not be seen as market friendly.  

Oh and it's August and bad things historically seem to percolate about this time of the year.  

Anyway that's the backdrop on what's occurring.  Now let's look at some numbers and money flow thoughts.  Major indices are down about 5-8% in the past week or so.  That's a pretty substantial move down in a pretty short period of time.  Per my post last Wednesday, so far we've resolved in the short term which way the market was going to trade.  We've currently fallen back into the trading range we've been working through for almost two years now, albeit at the upper end of the range.  We are nearing some important levels of support and we'll need to monitor how we react to these for clues as to where we go from here.  Stocks tend to start corrections with violent sell offs and it's pretty normal to see stocks lose in a short period of time 5-8% when markets change directions.  We will now watch for clues in any coming rebound in prices to see whether or not this is only a minor blip in the market's advance or something a bit deeper with more room to go on the downside.

If we're going to head lower then a likely probable level of support for markets is about 2,750-2,700 on the S&P 500.  That would represent about another 3-5% decline on stocks and a 8-10% decline from last weeks highs.  It would still be a gain of approximately 6-9% for the year depending on what happens and how close to those levels we'd potentially trade to.  Not saying this is going to happen.  Just giving some obvious levels on markets.  

Finally, unless you're a short term trader or have experienced a change in your asset allocation then one should think carefully before contemplating making sales based on the past week's news.  My suggestion is to see how we react to any inevitable rally before making that kind of decision.  Again, that's just a broad based thought based on past experience of how market's trade and shouldn't be considered a blanket recommendation for anybody reading this blog.

Things look pretty grim in my book for Hong Kong right now.  Oh and did I mention it's August?

I'll report back if I see anything of interest.  

*Long ETFs related to the S&P 500,  in client account and personal accounts, although positions can change at any time    Also established in a personal account after this post was placed on line a short term trading position in a security related to the S&P 500 as part of a separate individual portfolio strategy that I only employ in family accounts. We reserve the right to change these investments without notice on this blog or via any other form of verbal, written or electronic communication.