As referenced in our July 15 Blog, the China Slowdown was one of our top concerns for the global economy and U.S. markets. This morning, the fear and panic from global equities has moderated even though the culprit of the “crisis” (Chinese equities) continued to slide overnight. Global markets today seem to be somewhat more confident now that China has cut reserve requirements and interest rates overnight. U.S. markets are also optimistic that the Fed might remain on hold which has also ratcheted down fear and anxiety.
The last three days in the markets are a lesson in the importance of patience and sticking to your strategy. Technical analysis had very little to offer during such a short, intraday period when so much of the volatility was due to exogenous fundamental and economic factors. Panic selling on the open yesterday and panic buying as the markets rallied to near-breakeven levels in the early afternoon would have left you whipsawed.
Fundamentally, the market seems to be overdone especially as it relates to a China slowdown (anecdotally confirmed yesterday by several corporate CEOs who deal with China and physical commodities). While the major US markets rejected the sharp washout and recovered somewhat yesterday (and this morning), the snap back was not necessarily indicative of a complete exhaustion move. The markets may have found a bottom for now but until economic sentiment settles back into positive ground and/or Chinese markets calm down, volatility will remain high. Over the near term, it will be important for the Dow to hold above the 15,350 level from February 2014 that was retested yesterday.
TRADING UPDATE: While a temporary low may be in place, a new uptrend pattern is unlikely directly ahead. The accounts faired quite well yesterday relative to the broad market thanks to the continued use of inverse equity ETFs as a hedge for the long positions in the portfolios (hovering around 10% currently) and cash levels of 28-32% that are limiting the portfolios to about 60% of the market volatility. The cash can be put to work quickly should we see opportunities present themselves and the hedge positions will remain a trading tool to improve risk exposure in the portfolios.