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Mish's Daily: Stocks follow China lower, but this is strange

September 1, 2015

By Mish Schneider

Note: Tonight’s evening watch was written by Jonathan Griffin Assistant Director of trading education and research.

No place to hide!

On Tuesday we saw the markets give up most of last week’s rally, with the SPY gapping lower by 2.3% on the open. Yet it was strange that despite the gap down in SPY, TLT which would normally rally as a place investors run for safety barely rose and even went down on the day.

Theories are flying as to what is causing the bearish action and overall weakness in the US bond markets. One reason could just be that markets really believe interest rates are going up no matter what stocks do.

Another theory is that China has been selling its US bonds for capital to help prop up its falling markets, and they’ve been doing a lot for that (see below).

Even though VIX was elevated, which indicated a fearful market, the pace of selling was controlled. There wasn’t any capitulation selling.

There may not have been any real panic or flight to safety, but as you’ll read below there were very few sectors that were immune to the heavy selling.

Our Modern Family is a great example that everything can get hit on a big down day. For example, the Russell’s (IWM) is a day away from a death cross. Regional banks (KRE) closed down over 4%. Biotechnology (IBB) confirmed a distribution phase. Transportation (IYT) gave up everything gained in last week’s rally. Semiconductors failed to hold their 10 DMA but are however holding support at last Monday’s highs. Lastly that leaves Retail (XRT) which also failed to hold its 10 DMA and closed down 1.8%.

Since China seems to be our problem…

What’s China doing to prop up its market?

With their markets failing, the Chinese government has taken many steps to try to end the dropping equity prices.

One thing China has done to try and balance its markets, was to stop all new IPO’s. The logic behind this being that the fewer instruments there are, the less diluted the money flow into the established companies will be. Thus stabilizing the existing market.

In an even more aggressive attempt to manipulate markets, the Chinese government has executed sanctioned equity buybacks.

Over the last several days China’s SSE 50 (Index of large cap stocks) has rallied intra-day each day by almost 6.5%. These rallies occurred during the late part of the trading day, usually starting an hour before the close. These rallies are caused by China’s “Market Rescue Fund” buying large positions in key banks and agricultural lenders alike.

The Chinese securities regulator ask brokerages to contribute 100 billion yuan (15.7 billion U.S.) to the fund, during a meeting on Saturday that was attended by over 50 leading Chinese brokerage firms. Part of this push is an attempt by the Chinese government to stabilize their markets before a World War II victory parade set to take place this Thursday.

S&P 500 (SPY) After failing to clear the 10 DMA for two days in a row this gapped lower and chopped during Tuesday’s action. Needs to hold today’s low or it could revisit the 182 area.

Russell 2000 (IWM) Found resistance at the 10 DMA at 114.08. Also held off the Death Cross for another day.

Dow (DIA) Tried to rebound after the gap lower but found resistance near the closing price from Wednesday the 26th.

Nasdaq (QQQ) 103.360 proving to be strong resistance and then the overhead 10 DMA at 103.58 as well.

Volatility Index (VIX) Big move3 to the upside after the inside day on Monday. Potential runaway gap if continues.

XLF (Financials) Not a good start to the month, failing monthly support at 23.18.

KRE (Regional Banks) Failed daily, weekly and monthly support between 40.50 and 40.10. Now very weak.

SMH (Semiconductors) Failed to hold the 10 DMA at 48.06.

IYT (Transportation) Sold off with the rest of the market. Next support is at 134.00.

IBB (Biotechnology) Confirmed the distribution phase with the overhead 200 DMA now at 344.00.

XRT (Retail) Back under the 10 DMA at 92.16, however still holding monthly support at 90.73.

IYR (Real Estate) Failed last Monday’s low but bounced from weekly support at 68.30.

XHB (US HomeBuilders) Now in an unconfirmed distribution phase with the 200 DMA at 35.59.

GLD (Gold Trust) After gapping higher for the open this proceeded to sell off and barley managed to hold the 10 DMA for the close.

SLV (Silver) The inside day here suggest that this needed a day of rest.

GDX (Gold Miners) Not great action considering GLD closed up on the day but still holding the support at 13.00.

USO (US Oil Fund) Not surprising to see an inside day here after the massive rally that we saw over the last three days. 16.13 is the next resistance to clear.

OIH (Oil Services) Also an inside day under the 50 DMA at 31.79.

UNG (US NatGas Fund) 12.50 area still proving to be good support!

TAN (Guggenheim Solar Energy) Hit with the rest of the market. Now needs to clear back over the 10 DMA at 29.10.

TLT (iShares 20+ Year Treasuries) Held support near the 50 DMA at 120.73.

UUP (Dollar Bull) Failed to hold the 200 DMA at 24.96 but did hold the 10 DMA at 24.89. Sandwiched yet again…

FXI (China Large Cap Fund) Down almost 5% on the day and also broke down out of a monthly channel dating back to October of 2011.

RSX (Russia) Up with oil and down with oil. Held at the 10 DMA at 15.58.

DBC (DB Commodity Index) Inside day