“Don’t trust your own opinion and always back your judgment until the action of the market confirms your theory.”
AS I write this U.S. index futures are getting obliterated. This comes in tandem of China's weaker yuan that has since created a rout in their equities just days before their Chinese New Year. This tumble has triggered their circuit breakers for the second time this week.
The ES_F index is down a little over 1% to 1961 on the lows. That's nothing in comparison to what's happening in China though where the Chinese stock exchanges shut down shop less than a half hour after they opened after the CSI 300 Index obliterated more 7% triggering another circuit breaker event.
The catalyst for the selloff in Asia comes after China's central bank cut its daily reference rate more than any other time since August. China's signaling to the rest of the world that they've got an increased threshold to do what it takes to shore up their weakening economic growth.
JENGA
China puts everyone else on edge Jenga style.
We've seen an accelerated retreat from risky assets to start the new year. With the riskiest equities taking it on the chin first. The index as a whole has already seen a 2.4% haircut and will presumably end the day and week lower than that.
This is a classic real life scenario of the popular game Jenga. With different blocks coming off the whole group one by one. Unlike Jenga however, we don't actually need to see these blocks come down. Financial markets are operating in fear that the yuan's sharp depreciation may only accelerate, which would signal that China's economy is even weaker than everyone believed. If that's the case we could see a spark of another wave of devaluations around all of Asia and in other key countries/economies.
With Wall Street closing at three month lows on steady volume, the signal is clear. Risk aversion is on the board. Asset managers are getting out of the riskiest assets and avoiding another shoe dropping on them. This risk aversion was only amplified by the overnight plummeting price of oil and the geopolitical concerns behind North Korea's nuclear test on Wednesday evening. And now we get this shit. Fuckin' China.
LINES
Let's take a look at some levels.
SPX has been in a downtrend on the daily. 1973ish and 1954ish are the next lines int he sand.
Above you we see the S&P 500 levels and downtrend on a daily basis. Below we'll see it on a weekly basis.
SPX weekly
DOWN DOWN DOWN
With all the turmoil and an absence of buyers in the market the bias remains to the downside. And with uncertainty as to how levered banks are and the level of exposure they may be facing when oil companies start going down this makes for a very troubled market situation. As I stated in the first post of the new year, the catastrophes that may lay buried underneath the oil madness are uncertain as of now and we should not try to pick bottoms. With a hint today that levels of credit default swaps in oil backed securities possibly being so high in some companies that bankruptcies and failures are nearly imminent, it goes without saying, get the fuck out the way.
It is quite obvious beyond that rhetoric that in some cases a chase for performance and growth may continue so it is my bias that we continue to trade opportunities to the long side as they present themselves while maintaining a downward bias.