On the heels of an absolutely wild trading day where the Dow had a more than 700 point trading range, before closing at the lows of the day down more than 200 points, today one of the greats in the business sent King World News a fantastic piece discussing the chaos in global markets, including China’s crashing stock market, and warning that the stock market rout is set to continue, plus a bonus Q&A that includes questions on the action in markets, including gold, the mining shares and much more.
By Bill Fleckenstein President Of Fleckenstein Capital
August 25 (King World News) – China was back in the news last night: its market fell about 7%, despite an injection of about $25 billion into the money market there and, after the close, the Chinese cut reserve requirements by 50 basis points and the bank lending rate by 25….
Continue reading the Bill Fleckenstein piece below…
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However, the rest of Asia was higher, with the exception of Japan, which fell 4%, and Europe gained 4%. All of that set the stage for an overnight rally in the SPOOs and an approximately 2%-plus higher opening in our stock market. After the initial ramp, the market traded essentially sideways through midday before starting to leak in the afternoon. That leakage turned into a selloff, and with 30 minutes to go the S&P was back to flat on the day.
Then it got nasty. The last half hour was straight down, with the Dow/S&P ending with a 1.5% loss for the day (while the Nasdaq was off 0.5%). Today’s poor market action now sets the stage for another selloff very soon if the bulls can’t muster a big rally as soon as possible, which seems unlikely.
Yuan Step At a Time
Away from stocks, green paper enjoyed a very strong rally after its recent drubbing, and fixed income was hammered here, as well as in Europe. I don’t know that the action in bonds means much these days, but given the maneuvers the Chinese are making and the need for them to sell dollars to buy yuan and support their currency, it may be an indication that they will be sellers of U.S. and other government debt from time to time, depending on what exactly their FX interventions require. That development may matter down the road, but I doubt it will have much significance in the short term.
Turning to commodities, oil gained a couple of percent and copper added 2%, but the precious metals were sold, with silver losing 0.75% to gold’s 1.5%. The miners took it on the chin again today after being punished yesterday.
Better Late Than At the Same Time
Given all the questions I’ve received about them, I would like to make one point: the miners were not sold “with” the market yesterday. They held up most of the day and then fell apart at the end, as gold weakened. I realize that is a fine distinction, and a losing day is a losing day. But it seems like so many think if we had true panic in the markets, the miners would get sold. However, when we had the panic yesterday they weren’t being sold, they were only hit after the panic started to abate, which I think is worth keeping in mind.
As to what’s going to trigger a move higher in the metals complex, there is no shortage of potential catalysts. The only question is what events really need to take place to finally break the psychology of central bank omnipotence. Yes, that mindset has been dented, but as we can see by the action in the metals, not much so far.
Included below are five questions and answers from today’s Q&A with Bill Fleckenstein. The questions are from his subscribers and they get to read Fleckenstein’s answers every day.
Bonus Q&A
Question: So this is what happens when the machines get going on the downside, huh? I am not sure about anyone else, but I had a frustrating morning. My online broker was down and couldn’t access for the decline. This decline was so fast it felt like not many people were able to buy/cover near the bottom. This is the second time my broker was offline when I needed to cover. It gives me little confidence when there is a steep/panic decline again that I will be able to act or react.
Might just be better off in miners/gold. Just an observation from a retail Joe. We did bounce hard but still off 2.5%. Lot of damage done.
Although we may bounce for a couple weeks, given that I couldn’t close on my puts, wouldn’t it be ok to hold on till Oct/Nov for another decline? I can’t see this being an ’87 type scenario where we just power ahead. The world is in such disarray and emerging markets are getting destroyed.
Great insight into this decline btw! Well called.
Answer from Fleck: “Monday was just the warm up, much more damage to come, though the exact path is unknowable.“
Question: I was really surprised to see several iShares small and mid cap ETFs (IJJ, IJT, IJJ, IJK) down 20-25% shortly after the open on Monday. I even placed a few token buys thinking the numbers had to be a mistake, but based on a couple of executions I doubt they were.
I was told trading was halted on all ETFs during part of the morning trading. It was a good reminder of what happens when liquidity goes away and everyone tries to run through the door at the same time.
Shame on me for being surprised. Thanks for your invaluable service!
Answer from Fleck: “Lots of dislocations are still ahead of us, be prepared. You’re welcome.“
Question: Fleck, crazy day on Monday obviously. When I saw the overall market getting hammered, then heard the dollar index down pretty hard, I expected to see gold skyrocket. Not only didn’t it make a huge move up, it traded down today. Does this surprise you?
Answer from Fleck: “Yes it did actually, but surprises are part of the business. I didn’t think QE would cause the SPOOS or gold to go where they did, but it happened.“
Question: Hi Fleck, I am baffled. On Friday and Monday we had a significant downdraft with lots of fear in the markets. Yet on Monday the gold minders (GDX) and the Jr Miners (GDXJ) were down -8% or so. I do not understand why unless there was heavy selling from margin calls. Can you please provide some logic to this major sell-off in GDX and GDXJ? Thank you for your insight.
Answer from Fleck: “Sorry, I can’t, they held up well all day and then got crushed in the last hour. I cannot come up with a cogent explanation.“
Question: “TOKYO–A close adviser to Prime Minister Shinzo Abe said Tuesday that the Bank of Japan should consider additional monetary easing if the yen rises sharply, threatening the “Abenomics” growth plan. That didn’t take long …
Answer from Fleck: “Nope.“
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