[Chart courtesy of MarketWatch.com]

1. Moving the markets

The continuing crisis in China with their worsening Evergrande developer spectacle and potential default in the hundreds of billions of dollars, was simply moved to back burner, at least for this session.

However, this fact remains:

But the elephant in the room is not the write down of a modest $18 billion in foreign bonds to the likes of Blackrock, for whom this is peanuts. The real question is how an Evergrande failure would impact confidence in China’s property sector and whether it will lead to a sharp drop in what has traditionally been the world’s most valuable asset, one which represents some 70% of China’s urban household net worth.

For sure, we have not heard the last of this predicament…

Dominating the markets was the Fed and its indication that current monetary stimulus would continue just a while longer, with the powers to be not yet having announced a formal starting date.

The central bank issued a statement following the meeting that said if progress continues “as expected,” then a “moderation in the pace of asset purchases may soon be warranted.”

That was sufficient encouragement, and equities shifted into overdrive with the three major indexes adding over 1% each. To no surprise, this ramp-a-thon was enough to wipe out the losses sustained on Monday and Tuesday and push the indexes back into the green for the week.

I took the opportunity to replace our recently sold value ETF with a more appropriate holding for the current environment.

It was a tale two markets with stocks up and everything else down. Another big assist came from a short squeeze, which helped to pull the indexes out of their doldrums. The US Dollar gagged and surrendered yesterday’s gains.  

Bond yields surged and gold got purged, as even a diving dollar could not prevent the precious metal price from being shaken up.

As a reminder, I will be out again tomorrow, so there will be no market commentary, but I will post the weekly StatSheet by 6:30 pm PST tonight.

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[Chart courtesy of MarketWatch.com]

1. Moving the markets

Despite the Fed’s (FOMC) most hawkish statement in 3 years, the markets took it as a positive and propelled the major indexes out of their recent doldrums, with all 3 of them advancing around 1% for the session.

Support for stocks came from the fact that the Fed will not initiate an immediate rollback of monetary stimulus, which has been a supporting actor to keep the markets elevated over the recent years.

The FOMC signaled a rate hike in 2022, with Fed head Powell noting that “tapering ending around mid-2022 may be appropriate.” That matched expectations that the start of taper might begin in December at a reduction of $15 billion per month, which means the actual announcement will be still forthcoming.

Added analyst Graham Summers:

By way of comparison, during the Fed’s last QE taper (that pertaining to QE 3 in 2017), the Fed reduced the pace of its then-QE program by $10 billion every THREE months, with the pace stopping at $30 billion per month.

Again, the current proposed tightening is much faster and aggressive than the last.

The big question is how the markets digest this. The last time the Fed attempted to taper a major QE program, it ultimately blew up the corporate debt markets resulting in stocks collapsing 20% in a matter of weeks.

The market’s rise was interrupted by reversals, with equities coming off their highs, the US Dollar crawling out of an early hole and ramping higher, while gold lost its early shine and was dumped into the close.

10-year bond yields bounced around aimlessly and remained stuck in their 3-day trading range.

It was an interesting ride, but in the end reality comes down to the direction of the Fed’s balance sheet, no matter what the underlying economic conditions indicate, as Bloomberg demonstrates in this chart.

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[Chart courtesy of MarketWatch.com]

1. Moving the markets

An early bounce, indicating dip buyers stepping in to take advantage of lower prices because of yesterday’s slam, ran out of steam with the major indexes lacking bullish conviction to turn this session into a turnaround Tuesday.

Despite valiant efforts, the Dow and the S&P 500 gave up all early gains and slipped slightly into the red, but the Nasdaq managed to buck the trend by closing marginally in the green.

In my advisor practice, we finally pulled the trigger and sold the value ETF RPV, which had been dancing around its trailing sell stop for quite some time and did not show any signs of life during the early rebound.

This ETF performed well early in the year but has lately been a disappointment. This move reduces some our equity exposure which, given current uncertainties, appears to be a wise choice. Once volatility dies down again, and we are moving into the seasonally strong part of the year, we will replace this empty spot with a more appropriate ETF.

All eyes were on the current Fed meeting with the results due out tomorrow. Traders are looking for Fed head Powell to reveal some of the Central Bank’s plans to taper its bond buying agenda, especially the timing of such. Also eagerly awaited are the quarterly economic forecasts along with a statement on interest rates.

ZeroHege posted an interesting take about tomorrow’s September 22^nd:

As infamous market-seer, W.D. Gann once noted, September 22nd (the Autumnal Equinox) is the most important date in markets – when markets are more likely to reverse than any other day of the year. For some reason, stocks, commodities, and currencies have a curious tendency to make major tops or bottoms on this day.

Today’s rebound was lacking breadth, which compares the number of stocks below their respective 200-day Moving Averages to the index, a picture that is worth a thousand words. This another reason why reduced equity exposure in these uncertain times is a good idea.

The US Dollar rode the roller coaster and ended just about unchanged, while bond yields edged higher with the 10-year now back over 1.32%. Gold rose +0.64% and managed to be a haven of safety, at least for this day.    

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[Chart courtesy of MarketWatch.com]

1. Moving the markets

The market mantra of the past few weeks of “digging a hole and climbing out of it” failed miserably today, as dip buyers remained conspicuously absent thereby handing the directional baton to the bears.

A host of factors combined forces to pull the markets down, including Delta troubles, Fed taper talk, the upcoming debt ceiling battle, seasonality in that the second half of September has been historically one of the worst periods for stocks, inflation fears, and the fact that we are way overdue for a correction if not the bursting of the bubble.

The latter only needed a pin prick, and that may have just occurred via the collapse of the Evergrande empire, a massive Chinese property developer with worldwide projects, which has become insolvent because of $300 billion in bad loans. Their stock plunged 80% YTD.

This story has been developing over the past week or so, with fears increasing that the cockroach theory may play out again in that there is never just one. While we don’t know the other names yet, contagion has already begun as a variety of Chinese construction/real estate ventures are collapsing and developers and industrial producers getting punished.

Some analysts have referred to Evergrande as being the next Lehman Brothers, the demise of which was instrumental in collapsing the financial markets in 2008.

All this uncertainty resulted in equities being hit, but it’s noteworthy that a last hour rebound prevented a worse outcome. It remains to be seen whether there is more downside to come, or if dip buyers will re-appear.

There were no winners, but as was to be expected bond yields dropped, and the US Dollar rode the range but closed about unchanged. Gold was the shining star by gaining +0.79%, which was one of the few green numbers on the computer screens.

We have now reached a point where markets could break either way, meaning they could recover or the bubble might burst entirely, which brings up the interesting question as to whether history might repeat itself, as Bloomberg demonstrates in this chart.  

That is why it’s critical to have an exit strategy in place designed to prevent the participation in the worst-case scenario. As you know, I use a combination of trailing sell stops and my Trend Tracking Indexes (TTIs). You can see their latest update in section 3 below.

My posting schedule for this week has slightly changed again and is updated here.

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