After Monday's big rally, stocks tanked on Tuesday triggered by China's devaluation of the their currency, the yuan. The Dow lost 212-points and it has been down 7 of the last 8 trading days. Welcome to early August.
China devalued their yuan by 2%, which is actually a major move compared to prior moves - 5 times bigger than any other devaluations in the last 10 years. Why does this matter? It sent commodities and commodity related stocks sinking. Wheat, corn, soybeans, steel, and particularly oil moved sharply lower. Energy stocks are getting hammered and that impacts the indices, as does any company that does business in China, i.e. Apple.
More currency manipulation reported Tuesday tonight has the futures down sharply again.
With these developments, a Fed rate hike becomes a magnified factor in that the economy is already showing signs of wobbling. Add a trade war and a rate hike could push us back into a recession. The stock market may be seeing the writing on the wall. But I assume the Fed sees this too as we approach the September FOMC meeting where a rate decision will be made. In the interim, economic reports may be big market movers.
Ironically, on a day when China, a country we've had on our radar for several week now as their stock market tumbled, is hitting the fan, Greece's stock market shot up 3% after they nailed down their $85 billion bailout deal.
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The stock funds all lost just short of 1% while bonds had a big day.
The S&P 500 chart is not broken yet, but we saw the Transportation index break down earlier this year, and right now the Dow is on the brink of a technical breakdown. Small caps have been lagging and are also on the verge. But just because we are seeing cracks, doesn't mean we're done for. By some of the reactions, you'd think we're in a bear market yet astonishingly, the S&P 500 is only about 2% off of its all-time highs, if you can believe it. Let's not make funeral arrangements for the market just yet, but perhaps we may consider getting some life insurance just in case.
The SPY (S&P 500 / C-fund) fell about 0.9% yesterday and it filled the big open gap created by Monday's strong open. I like when gaps get filled quickly so we don't have to worry about it anymore. If stocks kept going higher after Monday's rally we'd constantly be looking over our shoulder at that gap knowing it's just a matter of time. Now it's done. The 207 > 206 area is still there as a support level as the right shoulder of the inverted head and shoulder gets formed. It's rarely a clean formation so I will consider the volatility this week as noise until the inverted H&S breaks down.
Chart provided courtesy of www.stockcharts.com, analysis by TSP Talk
The Dow Completion Index (S-fund) has been in a serious descending trend since the high in June. It has flirted with the 200-day EMA for weeks now but it has actually only closed below it twice. That 1085 area seems to be where buyers step up. That puts the bulls on the spot right away since it closed yesterday at 1087.
Chart provided courtesy of www.stockcharts.com, analysis by TSP Talk
The EFA (EAFE index / I-fund) backed off from its minor breakout on Monday. It has been bouncing above and below the 50-day EMA for weeks now so we'll have to see if the new development in China will overweigh the progress being made in Europe / Greece.
Chart provided courtesy of www.stockcharts.com, analysis by TSP Talk
The price of oil hit a low last March and then rebounded nearly 50% before peaking in and stabilizing in late spring, but since then it has fallen off a cliff and the lows are being tested again. It's tough to see on this chart but oil rallied on Monday and stocks had a big day. On Tuesday oil lost those gains plus a little more and stocks were rocked. Keep an eye on that $42 level. If the lows can hold, perhaps stocks will also rebound. Otherwise this could be what triggers the next correction / bear market.
Chart provided courtesy of www.stockcharts.com, analysis by TSP Talk
The Chinese Shanghai has been rebounding and has not made a new low in over a month. Devaluing their currency helps them as their exports become more attractive, but what's good for China is not so good for everybody else.
Chart provided courtesy of www.stockcharts.com, analysis by TSP Talk
The AGG (bonds / F-fund) was the beneficiary of China's devaluation and the sell-off in stocks. How do the Chinese devalue their currency? They buy U.S. bonds, so bonds rallied. The 109.75 has been a tough level for the AGG so let's see how it reacts as it approaches there again.
Chart provided courtesy of www.stockcharts.com, analysis by TSP Talk
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Thanks for reading! We'll see you back here tomorrow.
Tom Crowley
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