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Thursday, October 6, 2011

Market Thought... china syndrome

The market landed 0.03 points away from 1165. (Beautiful call, along with GS acting well, and soon it will be time to take on the Euro short again. In normal conditions I would have been buying GS yesterday, and doubling down on Friday. But whatever, bitching is for the weak. New day, new opportunity. I just have to wait for a few weeks.)  The 1165 call came from the 28sma of the monthly chart.

What was interesting today, was that the 10yr started to break from its negative trend.

This begins to add support to a bottoming out for the equity markets.

If the EU takes strong action, the market will move to the 1200 area. (I have highlighted before, the market removes the EU uncertainty at that level.)

At 1200, the market also prices in a decent slow down. (The market evaluation I highlighted was for a very drastic recession, which there is no evidence of at the moment. Recent rail carloads were pretty strong.)

So as the market sits around 1200, the concern become "leading indicator" US recession, and/or the China Syndrome.  Ever since the guy from ECRI stopped the media blitz, there has been little worth-while chatter about  a US recession. (SocGen came out with an estimate, but SocGen's analysis is bullshit and based on one graph with a very weak correlation.)

As for these 'leading indicators', consumer expectations, money supply, stock market, steel production, industrial product sales, newly started construction, non-financial service indicators, etc, just to name a few, can be corrupted if there are unusual shocks or discontinuations of patterns from external forces. Like a Fed induced twist or China specifically stops buying copper or steal for a few weeks because they want to slow down their construction to ease up on elevated prices.

The China-drastic-slow-down chatter has gotten louder, even though their economic numbers don't point to it.  All the bearish chatter on China is predicated on:

1. Bubble real-estate prices
2. Over capacity in housing and factories
3. bad local bank debts
4. bad accounting (Was anyone really surprised by this? We knew this since 2002!)

There is no question all these things are bad, but are they enough to bring GDP growth rate to 0%, as some estimates are floating around?  I do not know.  All I know is the command economy has

1. +$3 TRILLION in reserves
2. An extremely under leveraged consumer

The combination is potent. The Chinese government can easily cover enough bad loans that does not hurt their system (although their inefficient system needs desperate changing), and the Chinese consumer will not be hurt by any cooling of property prices.  The government can also infuse a lot of those reserves for stimulus, and further accelerate a domestic consumer-driven economy.

Basically, the China Syndrome is predicated on 'what ifs' that is dependent on the Chinese government to do nothing.

Where we go from the 1200 level will be dependent on the big boys ease up on their "leading economic indicator" and China Syndrome concerns. (I still hold the belief, if the SP500 can close above the 320SMA on the daily chart, we will see a tone of big boys respect the action, and negative views will fall to the waist side.)

Just an ending note, despite my feeling of frustration, I am very proud of myself.  Although I have no positions, and would feel better if the market simply went down, I am still very objective and calling it like I see it.  Unfortunately for me, the data suggest bullish activity.  I am proud of the fact my highlighted trades and market assessments are still pretty kick ass :P

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