Global stock markets took a decidedly risk-free tone on Monday. The spark was China Evergrande Group 3333,
crisis. Fears are growing that Evergrande is going from a liquidity crisis in which the real estate giant does not have enough cash to pay its obligations, to a solvency crisis in which the company’s assets are less than its liabilities if it is forced to make a liquidation. His properties.
In the US, the S&P 500 SPX,
he had been largely immune to the Evergrande news until Monday. The US benchmark decisively violated its 50-day moving average. Investors are freaking out not just from the possibility of an Evergrande contagion, but from a looming crisis in Washington over the debt ceiling.
Is this a buying opportunity or a crack in the dam that predicts disaster?
An internal crisis
Take a deep breath. An Evergrande collapse is unlikely to lead to crisis and contagion in emerging markets. This is because most of the company’s debts are denominated in RMB and few in US dollars and other foreign currencies. Global markets have emerged relatively unscathed from the crisis. There will be little global contagion effect because everything will be contained in China.
Several bearish investors have pointed to falling iron ore prices as signs of slowing growth in China, which could have global repercussions. But George Pearkes at Bespoke noted that prices for steel and other industrial metals are still holding up well.
So relax. Any contagion effect will be minimal.
A bottom of panic?
In the US, the stock market is starting to show signs of a bottom of panic. The Zweig amplitude push indicator has plunged into oversold territory, which is often a sign of a short-term low.
My lower models of the S&P 500 are starting to show buying signals. The five-day RSI is deeply oversold. The VIX index
It has risen above its upper Bollinger band, which is another oversold sign. The intraday reversed VIX time frame indicates fear.
Read: Evergrande fears crashing the stock market: here’s what investors need to know about the tottering real estate giant
Without question, this week (the week after September operating expenses) is historically the weakest week of the year, as documented by Rob Hanna in Quantifiable Edges. Nevertheless, Hanna noted that the average weekly reduction of the “weakest week” is -2.3%. With the S&P 500 down 1.7% on Monday, the index is approaching its average target downward.
While oversold markets may become more oversold, a bottom is coming. However, this market is not without risks. MarketWatch’s Mark Hulbert studied stock market performance in the two weeks leading up to the debt ceiling deployments, and returns have been disappointing. Also, this week’s FOMC meeting could be a source of volatility.
My inside trader plans to take an initial position on the long side of the S&P 500 at Tuesday’s open. This is a volatile market and traders must size their positions accordingly. Be prepared for a short-term bounce, followed by a retest of the lows later this week or possibly next week.
Plus: Why Evergrande has suddenly erupted into a potential global financial market crisis
Plus: Will Evergrande be China’s ‘Lehman Moment’? Wall Street says no