YUAN TAKES THE S&P FOR A RIDE BACK DOWN

on August 12, 2015

For the second day in a row the Chinese devalued their currency… more and more this is getting to look like a hostile act with no regard for its trading partners.

What happened to the quiet summer? Well, the summer is coming to an end, and it is ushering in some very bad vibes as the US markets head into the middle of August. After a 26 handle rally in the S&P futures on Monday, the futures did an about face to the downside after the Chinese devalued the YUAN. The China major markets closed unchanged, and the S&P futures closed down 20.10 handles.

It’s been long few months of ups and down for the S&P, and increasingly there is more and more negatives being thrown at the the index. If it’s not Greece, it’s China, if it’s not China, its the US. Clearly all the global liquidation of stocks, bonds, and commodities is playing out in the market place.

It took 6 years to build the bull market and while there have been no 10% corrections since October 11, 2011, that’s 1407 days, and despite the non-stop up and down trade, the S&P futures remain 20 handles away from S&P 2100, so how bad can it be? There is a push me / pull me type trade going on, but most of it is not coming from the US, its coming from China. Right now it’s not the Fed that traders are worrying about, its China manipulating the currency markets. By devaluing the Yuan it strengthens the dollar, which is intended to increase Chinese profits, and to raise and lower the profits of its trading partners, all while President Obama continues to push his Trans-Pacific Partnership, which is already threatening to hurt American jobs and lower wages.

CHINA TRADING PARTNERS IN DISMAY

Last night the Chinese devalued the Yuan for the second day in a row. The government doesn’t seem to care much about its trading partners, both in the US, and Europe. According to Reuters, there is a rumor floating around that the Chinese are planning on devaluing their currency by as much as 10%. Last night, after the headline hit the tape, the S&P futures (ESU15:CME) sold off 20 handles from 2085.00 down to 2065.00 in a matter of minutes. There is no doubt about how the Chinese are acting, land reclamation in the South China seas (land grab) and a total disregard for trying to preserve the idea of free markets. But it’s not just China that is doing a land grab. The Russians are now claiming 463,00 square miles in the Antarctic which is going to cause big problems for the US and Canada.

TIS THE SEASON

Look, I could do all the ups and downs and twist and turns of the day’s trade, but you can get that anywhere. My background is providing a feel for the ‘price action’ of the S&P. What I did on the floor I am doing for you today. Its not textbook, and no its not always right, but I have taken all my knowledge, and 38 years of running desk operations and floor trading, and try to push ideas out that usually go counter to the direction of the index markets. Its not rocket science, it is something you can learn but you have to give it time. Both my winning trades while only 3 to 5 handle winners were taking a stab at buying them when everyone was selling them. Yes, I trade both sides of the markets, but you know what? I live for catching the falling knives, but I am starting to worry that the knife may keep going one of these days.

Traders, the markets are wavering and we are going into a very volatile period where the markets are subject to the next headline. Its not like it used to be, where you didn’t have to worry about Europe or China, because the US was the market leader. Right now that ball is moving overseas, but it’s my guess a lot of that money starts moving back up in the US stock markets in the 4th quarter. Until then.. keep your chin straps handy.

ASIA and EUROPE DOWN ACROSS THE BOARD

In Asia, 11 out of 11 markets quoted closed lower (Shanghai Comp. -1.06%, Hang Seng -2.38%), and in Europe 12 out of 12 markets are trading lower this morning (DAX -2.64%). Today’s economic schedule starts with the MBA Mortgage Application, William Dudley speaks, Atlanta Fed Business Expectations, JOLTS, EIA Petroleum Status Report, 10 Yr-Note Auction, and the Treasury Budget

Our View: I actually want to see the ES break out of this range, but I am not sure it can. They throw everything but the kitchen sink at the spoos and I still think the US markets will shrug this weakness off. What I get out of this is not so much that the S&P is weak, but being pulled down by the Chinese manipulation, there are no free markets in China. Yesterday, my view was to buy the early weakness and sell the rallies, that was right on. Today i want to sell the early rally and buy the weakness. Remember, the view is more for directional scalping then it is overall direction. And lastly; don’t forget the PitBulls Thursday / Friday low.