China Cuts Reserve Requirements 50 Basis Points

China Cuts Reserve Requirements China’s PBOC lowered bank reserve requirements by 50bp at the end of their business day on Tuesday. Day traders had a field-day.

Hitting the news wires shortly after 6:00 AM EST this move has kicked the futures rally into second gear, now projecting market averages could erase most of Monday’s losses in the first few minutes of trading.  Holding those gains throughout the day is another hurdle.

While this was done after the close of trading in China on Tuesday, it’s well timed for the opening of trading in New York later this morning.  Additionally China has put out a statement that they will no longer intervene in their stock markets.  They notably declined to intervene as the Shanghai Composite traded 15% lower the first 2 days of the week, well below the 3500 level that they had supported early last week.

China has a very very long term view toward many things and this is a very positive first step toward rebuilding  confidence of Global Fund managers that their market is a “fair game”.  

Monday recap:  This week began very much as last week ended with Raising Cash the theme dominating the mindset of institutional investors.  For all or the record setting price moves and extreme intraday volatility,  it’s remarkable that major market averages all settled with near identical losses.  The S&P 500, NASDAQ, Russell 2000 and NYSE Composite all ended the day with losses ranging between -3.8% and -4.0%.  the DJIA was a whisker better at -3.6%.

China Cuts Reserve Requirements 50 Basis Points

Continued turmoil in Chinese equity markets,  near historic currency volatility, uncertainty over timing of the initial FOMC interest rate hike and a growing angst over Q3 earnings which are now less than 2 months away  all contributed to a “Shoot First and ask Questions Later” mentality to start the week.

To say Investors had no place to hide is an understatement.   Electric Utilities declined by -4.1% despite positive headlines in the sector and bonds rallying to bring the yield on the benchmark 10 year Treasury note below 2% for the first time in months. Crude oil declined 5% as the NYMEX oil contract traded with a $38 handle.

Gold gave up early gains to close lower by -0.5% snapping a meager 3 day winning streak, while Cash held its own at unchanged with no reported bank robberies or armored car hits.

Market Internals were truly startling and certainly speak of capitulation, excluding that the sell off only began in earnest 4 trading days ago.  Lets look at a few specifics:

Monday was the second highest dollar volume day on record, being eclipsed only by 1 day in October or November of 2008 near the depths of the global financial crisis.

China Cuts Reserve Requirements

Declining issues led advancing issues by nearly 20 to 1 on the NYSE and nearly 10 to 1 on NASDAQ.  I don’t recall stats that lopsided during the GFC of 2008 – 09.

Down volume was 34x up volume on NYSE and 16x up volume on NASDAQ.

52 week highs and lows may be the most mind numbing stat of the day with 1336 new lows and 7 new highs.  In the last 3 days while market averages have sold off 8½% the 52 week lows and highs look like this:   8/20:  368 lows, 8 highs;  8/21:  627 lows, 0(zero) highs; 8/24:  1336 lows, 7 highs.

Combined with the second highest dollar volume day on record, this of course speaks to Total Capitulation in the Immediate Term, and despite never being a fan of the “falling knife” trade, it’s rare that you ever see a stronger set up for a reflex trading rally.

Despite the severe technical damage done to the broad market averages,  and the inevitable “Death Crosses” to hit the S&P 500 and Russell 2000 indices in the next few weeks, the DJIA at 15,871 and NYSE composite at 9790 are the only broad based averages to close below their October 2014 lows.   The NYSE composite closed right at its Feb 3 2014 closing low, while the DJIA hit that level intraday and rallied off it.

The S&P 500 at 1893.21 closed just less than 2% above its Oct ‘14 closing low of 1863.

  China cuts Reserve Requirements

The NASDAQ at 4526  is still 7% above its October ‘14 lows of 4215 thanks largely to its outsized performance over the last 9 months.

The Russell 2000 at 1111.69 is also comfortably 6% higher than the October ‘14 closing low of 1049.30.  Recall that the Russell was the first market average in Oct 2014 to post consecutive gains on Oct 14 and 15 in 201 after that viscous 4 week sell off.

Those October 2014 lows are the best markers to use from here as support on any further sell off in the S&P 500, NASDAQ, and Russell 2000,  and initial resistance of any recovery rally by the DJIA and NYSE composite.

The Early Line: Despite another 7% decline in the Shanghai Composite, other markets in Asia have stabilized overnight, and Eurozone markets have started the day with gains close to 2%.

US Equity Futures are 3% higher in very early trading.  It will be a telling test to see at what levels sellers reappear on a reflex rally if the futures rally holds through the NY opening.   Monday we had a rally attempt midday after Eurozone markets closed that ran into stiff resistance at 1950 on the S&P 500.

tanderson@mndpartners.com tjanderson56@gmail.com

Twitter: @TJAnderson1

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