China’s stock market saw another sharp decline last night and that took the Shanghai Index below the 200-DMA for the first time in over a year. (Remember, that 200-DMA had provided excellent support for the stock market in March, April, and May, so the fact that the Shanghai Index has drop well below that line is definitely a bearish development.) China’s stock market fell 2.4% last night and has now declined over 5% in the last three trading sessions. Hong Kong has fared even worse. It fell 4.7% last night and is now down 9.5% over the last three trading days!
Both indices are getting oversold on a very-short-term basis, so they could be due for a bounce at some point over the next few days, but there is no question that these stock markets have experienced the kind of technical damage that will be difficult to recover from quickly. However, the more important issue is whether the moves that China has implemented in recent weeks and months will have a negative impact on their economy. If it does, and growth does indeed slow in China, the ripple effects would have an impact on global growth as well. That, in turn, could have an impact on the forward earnings estimates here in the U.S. for the second half of this year and for 2022. Given that the stock market is already extremely expensive (at 23x forward earnings), it could mean that the U.S. market will follow China’s market lower at some point over the coming months.
On top of this, we’re also very concerned about the situation with the China Evergrande Group. They are the world’s most indebted real estate developer and S&P Global cut their ratings late Monday. Their bonds, which had already been getting hit hard, are now trading at less than 50 cents on the dollar after the ratings cut. Yes, we agree that China’s government could step-in at any time, but the fact that they’ve let things go THIS far is yet ANOTHER big change in policy for them….and its starting to raise concerns about a contagion.
These (further) negative developments out of China are not having a big impact on the U.S. stock market. However, we worry that we’re looking at a similar situation we face in Q1 of 2020. We had a serious problem staring us straight in the face, and investors completely ignored it. When they finally woke-up, the market fell out of bed all at once. (Back then, it was Covid-19. Today it is the problems in China.) Therefore, this is yet another reason why we think investors should be raising some cash as we move through the rest of the summer and into the seasonally disruptive months of September and October. (First chart below.)
Shifting gears, the issue that is at the forefront of U.S. investors’ minds today is that three big tech names that are reporting after the close this evening. Thus, this will be the focus for many/most investors today and tomorrow morning. We do need to point out that all of them are getting quite overbought on their weekly RSI charts, so that could cause some problems if we get any surprisingly negative reports.
HOWEVER, two of the three are not as overbought as they got in early 2020. This is important because the Fed was providing a lot of liquidity back then as well. At the end of 2019, the Fed began a QE program to fix the repo market which had frozen in September of that year. This liquidity injection helped the stock market rally strongly into the end of 2019 and into early 2020. Given that the Fed is providing even more liquidity right now, there is a good chance these stocks can rally even further (even though they’re getting overbought). In other words, the Fed’s largess could easily bring these stocks to an even more extreme overbought level before they top-out (like they did in early 2020)…as long as the earnings reports are not disappointing.
We have provided the weekly charts on AAPL, GOOGL, and MSFT below. As you can see, only GOOGL is as overbought as it was back in the first quarter of 2020. AAPL and MSFT have further to go before they reach those lofty levels. Therefore, GOOGL is the stock that is the most vulnerable right now, BUT that should only be a problem if (repeat, IF) they miss their consensus estimates or provide poor guidance. Otherwise, there stocks should continue to push higher.
Of course, if Fed Chairman Powell suddenly sounds a bit less dovish on Wednesday, all bets are off. However, that can’t possibly happen…can it?
Matthew J. Maley
Chief Market Strategist
Miller Tabak + Co., LLC
Founder, The Maley Report
275 Grove St. Suite 2-400
Newton, MA 02466
Although the information contained in this report (not including disclosures contained herein) has been obtained from sources we believe to be reliable, the accuracy and completeness of such information and the opinions expressed herein cannot be guaranteed. This report is for informational purposes only and under no circumstances is it to be construed as an offer to sell, or a solicitation to buy, any security. Any recommendation contained in this report may not be appropriate for all investors. Trading options is not suitable for all investors and may involve risk of loss. Additional information is available upon request or by contacting us at Miller Tabak + Co., LLC, 200 Park Ave. Suite 1700, New York, NY 10166.