Posted 9:30 AM ET –Bull markets die hard when the Fed is printing money. With interest rates at historic lows, bond yields do not keep up with inflation and they generate negative real returns. Stocks are deemed to be the best investment alternative and all of that money is sloshing around looking for a home. This is an incredibly powerful market force and we won’t see a sustained market decline unless there is a credit crisis.
Today the FOMC statement will be released. From the FOMC Minutes in August we know that Fed Officials have been discussing a timeline for tapering. Any mention of tapering this year will spark selling. The Fed knows that the Evergrande situation has investors uneasy so they will soften the rhetoric.
China said that they will provide liquidity to the banking system if they feel that the collapse is impacting credit. They need to get ahead of the curve on this and investors are wondering if the issue is widespread. China’s market has been retreating most of the year and that is a warning sign. I suspect that this goes well beyond Evergrande.
This morning we learned that Evergrande will make the coupon payment due tomorrow. That has everyone breathing easier. I went back to 2007 and I started reading articles on Countrywide. They were the canary in the coalmine for the 2008-2009 financial crisis in the US. The news was completely discounted and it took another year for the full extent of the crisis to surface and for the market to react. When it did, the selling was fast and furious. I don’t know if Evergrande is a sign of things to come, but I do know that we need to be watchful.
The debt ceiling needs to be raised in September and politicians will take this down to the wire.
Swing traders with a 3-4 week time horizon should stay on the sidelines. We are seeing signs of weakness. Dips have been bought all year and this first drop to a major support level will tell us if the rally is in danger. I still believe that we will see selling pressure over the next few weeks.
Day traders should look for choppy trading today. There will be two-sided action. After the first two hours of trading the market action will die off and we will be “dead till the Fed”. I would wait 30 minutes to see if market direction after the FOMC is established. If it is a big move (consecutive long green/red candles closing on the high/low with little overlap) you can favor that move, but I would suggest not “overnighting”. Often we see a contra move overnight. Keep it small and stay fluid today.
Support is at the 100-day MA and resistance is at the 50-day MA.