Blame it on China? Really?

The headlines are blaming China for the turn lower in the US markets? I am not quite sure that China’s relaxed regulations on short selling stocks is the blame for a 1.5% sell off in the NASDAQ. It does make for a good headline and it did effectively grab my attention to determine what I failed to understand about the move by China. In the end all it did was get one more click on the article only to frustrate me into writing this blog post about the stupidity of this headline. Now I will admit that I follow the logic of the news hitting Chinese stocks and that (FXI dropping 4.8%) weighed on the US markets, but it was only adding to the angst about the US economic picture.

All said, the real challenge behind the selling is more to do with the news about the US economy. The news/data about the consumer price index (CPI) created the impact as it shows inflation heating up… that puts the Fed back in the picture… remember their number one mandate is to keep inflation low… that leads back to the issue of interest rate hikes to slow growth and in turn slow inflation… thus we must sell stocks because all of that is a bad for stocks… at least that is what the headlines say. It is the domino effect and if the speculation is believable enough it will keep going until it finds a level stupidity and then pause for effect. Therefore, blame the selling on the dominoes!

The challenge with the CPI data is it ignored the other positive data on Consumer Sentiment rising to 95.9 well ahead of expectations. Leading indicators were up 0.2% better than last month. Philly Fed on Thursday showed more improvement than expected. But, housing starts were lower than expected… had to be the weather. And, weekly jobless claims are slowly climbing back towards the 300k level. Bottom line is still mixed data and shows an economy that continues to fight for every inch of growth it finds.

One question… if all that is true (CPI impacting stocks), why did bond prices move up (interest rates lower)? They should be falling on the threat of interest rates ticking up? Maybe… the profit takers were just looking for a reason to sell stocks as we hit resistance on Wednesday at the top end of the range and without a positive catalyst in place or anticipated, the bad news gets blow out of proportion to justify the selling to bank the profits short term and then sit back and wait for the next opportunity. That sounds more reasonable than China allowing short selling pushing stocks down in the US markets.

The chart below is FXI and shows the 4.6% drop on Friday morning. The reaction was to the short selling rules. Question: does this continue? Is this used as a reason to bank the profits on the run higher in China? Our stop at $50 was hit this morning and now we watch to see how it all unfolds. I would expect more volatility and speculation in the Chinese markets. The opportunity will unfold in the coming days for now we watch.

Chart

RSX, Russia ETF is down 4.7% in sympathy with the global news. The drop overnight in the price of crude helped the speculation, but this will create a buying opportunity for those patient enough to let it unfold. Don’t rush back into the position let it develop.

Last, but not least watch the NASDAQ reaction this morning as it fell 1.5% early and is approaching the 50 DMA. Semiconductors fell 1.7% and reversed off support. Software fell 2.3%, Networking down 1.6%, Social Media off 2.4% and Technology overall was down 1.3%. Tech has been a laggard along with biotech for the major index. If it cannot regain upside leadership the challenge on the downside may continue.

Overall, not the Friday many expected when they went to bed… but, we are here and we will deal with it one day at a time and follow the trends as they develop. Please remember set your stops, manage your risk, and keep your emotions in check.