China Currency Move | Beware of What You Wish for

China currency devaluation stymies yesterday’s bullish tone…

For many years China has been accused of being everything from anti free trade to an outright currency manipulator, largely depending on where we were in the quadrennial election cycle.

These claimants have run the gamut from astute international economists with the chops to back it up to hack politicians (excuse the redundancy) looking to grab a sound bite headline.  These claims were the most heated when China was posting legitimate double digit growth during the last decade.

pbocOvernite the PBOC moved to make the Yuan’s value more reflective of market forces after a report this weekend that exports fell 8%+ in July vs. a year ago.  Ironically, this means market forces affect close to a 2% devaluation in the Yuan, rather than the increase that economists and US politicians had clamored for repeatedly during China’s span of double digit growth.

Monday recap:  Equity markets notched their sharpest rally in 6 weeks Monday as major market averages all gained between 1% and 1½%.  Markets opened higher and never looked back as numerous market barometers held key short to intermediate term support levels from the lows on Friday. Let’s take a closer look.

The S&P 500, +1.3% to 2104.18 again rallied smartly off its 200 day MA of 2074 after a brief intraday breech on Friday.  This is the third time in 4 weeks the S&P 500 has staged a sharp rally after threatening the 200 day MA.   On both July 10 and July 28 the S&P 500 rallied 1.2% and 1.25% respectively after settling within a few points of the 200 day MA the previous session.

The challenge is that the 200 day keeps rising while the S&P 500 wasn’t made a new closing high for nearly 2 months.  This, of course is setting up a “moment of truth” scenario where within the next 2 to 3 months the average will be forced to either break out to new highs or break the 200 day MA to the downside as the gap between the two keeps continues to narrow.   Stay tuned.

The DJIA, +1.4% to 17,615 snapped a 7 session losing streak, after trading below 17,300, midday on Friday. The closing low for 2015 is 15.165 from the last day of January.  The 7 day losing streak was the longest losing streak for the DJIA in 4 years, as mentioned by so many astute market watchers I don’t recall who to credit.

Having just broken a losing streak of 7 days and 12 down days in the last 15, the DJIA is due for a bounce, but has a lot of repair work to make it last.

The DJIA has now been below the 200 day MA for 12 consecutive days.  That’s a longer stretch than during the October 2014 market correction and an ominous warning sign still jumps off the charts.  The 50 day MA currently sits right on the 200 day and is poised to create the infamous “death cross” within a matter of days.

The last time the DJIA had its’ 50 day MA “death cross” below the 200 day we were in the throes of the Budget Impasse and potential Government Shutdown in August of 2011.   The DJIA was below 12,000. It took 4 months for the 50 day to regain the 200 day during the Santa Clause rally of 2011.

The Early Line:  The devaluation move by the PBOC has thrown the proverbial monkey wrench into the rally from yesterday in both stocks and crude oil.

Although many very astute observers have hinted during the last 4 to 6 weeks that this was a likely scenario, most thought it would not come until the IMF had accepted the Chinese Yuan as a “reserve currency” sometime in September or October.

With early futures trading calling for market averages to give back a good chunk of Monday’s gains in the first hour of trading, great uncertainty lurks amongst the wide array of collateral implications for global stocks and other asset prices.

Most importantly, beware the pedestrian talking heads on the currency issue.    There’s nothing simple about it and many of them are confused at best.

tanderson@mndpartners.com tjanderson56@gmail.com

Twitter: @TJAnderson1

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