TLT Update: Let's Talk About the Elephant in the Room: China

Today, I want to depart a bit from the usual topics of discussion and talk about something entirely different:  China.  (Or, as Trump might call it: "Chy-naa.")

As many readers probably know, Evergrande, the most indebted real-estate developer in the immediate Solar System, and possibly in the entire Milky Way Galaxy, defaulted on its debt in 2021, but was back in the news again last week when a Hong Kong court ordered its liquidation.  Evergrande has $300 billion in liabilities and (theoretically -- who knows in practice with an insolvent entity) $240 billion in assets.

While this is not unexpected and likely already "priced in" (whatever that means, as if investors could possibly know how to "price in" an event like this), the liquidation process could impact investor confidence, not only in China's property sector but also more broadly in emerging markets.  

China's real estate weakness, partially stemming from Evergrande's collapse (and, if Peter Zeihan is correct, China's larger demographics problem) and partially stemming from massive overbuilding, has been a significant headwind for China's growth. The has contributed to a decline in consumer and investor confidence, affecting China's economy.  

The resolution of Evergrande's debts could, in the long run, help restore access to capital markets for Chinese firms, but the immediate effects might include further pressure on already fragile markets.

Parallel with that, the Chinese yuan has been experiencing a decline in value due its stuttering economy, widening yield differentials with other major currencies, and geopolitical tensions. The strength of the US dollar, driven by hawkish Fed policy, has also played a significant role in the yuan's weakness. China's central bank has taken measures to support the yuan, such as setting the yuan midpoint firmer than market projections and cutting the foreign exchange reserve requirement ratio (RRR) for financial institutions. 

So here's where it all starts to get interesting: In the event the yuan ultimately continues to fall, the global playing field of the past many years begins to change:  A weaker yuan can boost Chinese exports by making them more competitive internationally, which could potentially lead to trade imbalances with other countries. However, it also raises the cost of imports in China, which could impact global commodity markets and multinational companies with significant operations in China. Additionally, a depreciating yuan might lead to capital outflows from China, affecting emerging markets and global financial stability. It's also worth noting that the yuan's performance against a trade-weighted basket of currencies is an important indicator of stability for emerging markets, and a stable yuan can serve as an anchor of stability for these markets. 

The slowing of China's economy has raised concerns about the possibility of a recession and its subsequent global impact. Several factors contribute to the economic slowdown, including the bursting of the property bubble, which has significantly impacted household wealth, primarily invested in real estate. With 70% of Chinese household wealth tied up in real estate, a major slowdown in the sector affects other parts of the economy. 

We all know how things went when the U.S. housing bubble burst in 2006-2008 -- and it's worth remembering that it didn't happen overnight, even though many of us saw it coming. 

The collapse of U.S. financial markets was gradual... then all at once.  

China could be the same way.

Additionally, China faces challenges such as high levels of municipal debt and subdued household spending, which is among the lowest in the world as a percentage of GDP. These issues point to structural imbalances within the Chinese economy, heavily reliant on debt-fueled investment​​. For many in China, particularly young graduates facing a record-high unemployment crisis, the economic downturn feels like a recession. The high youth unemployment rates, coupled with deflationary pressures and diminishing household wealth due to declining property values, contribute to a crisis of confidence that deters consumer spending and business investment. 

In other words, this situation could potentially spiral into a self-feeding mechanism that erodes China's long-term economic potential​​, and a recession in China would almost certainly have significant implications for global financial markets. As the world's second-largest economy, any major economic shifts in China can affect global supply chains, commodity prices, and overall market sentiment. 

Emerging markets, in particular, might feel the impact more acutely due to their economic ties with China. A decrease in Chinese demand for imports can lead to lower export revenues for these countries, while a decline in Chinese outbound investment can reduce capital flows into emerging markets. Additionally, global investors might become more risk-averse, leading to increased market volatility and shifts in currency values.

The good news for the U.S. is that a recession in China would likely help end U.S. inflation (and may already be doing so) and, since China is The World's WalMart, might even be deflationary.  

The bad news is that a Chinese recession could lead to a host of problems, such as supply chain disruption (since China makes most of the world's widget parts), falling commodity prices (since China is a major consumer of commodities), reduced demand for U.S. exports to China, slowing global growth, currency fluctuations and general instability.

All of which would almost certainly, in turn, negatively impact investor sentiment and could lead to a "risk-off" mentality.  And the contagion potentials are almost certainly legion.

So, all that to say, it's worth watching heading forward.  My thoughts about China this weekend led me to rethink my long-term TLT chart.  Could a recession in China be the catalyst that ultimately leads to deflationary pressures that force the Fed to reverse course?  It's worth remembering that last time we looked at TLT's chart, I noted that it had reached a major inflection point for a potentially-complete C-wave correction down.  Could China make that complete correction a reality and lead to a final wave up in TLT -- before everything comes crashing down globally?

And, beyond all that, if a Chinese recession created major discontent among its youth, could all of that lead to desperation on China's part -- i.e.- could it ultimately become a catalyst for war?  Historically, that's the pattern many other countries have followed.

It's certainly food for thought.  Trade safe.

SPX Update: Nonfarm Groundhog Day

Today is, of course, Groundhog Day, which means that if nonfarm payrolls are up significantly, we get six more weeks without rate cuts.  Especially given that, on Wednesday, Fed Chairdude Powell, having lost a bet, was forced to give his press conference wearing an "Audit the Fed!" t-shirt while walking back some of his previous imminent-rate-cut nonsense.

Just in:  NFP was up significantly, well beyond estimates, so bulls will have to find some other excuse to spend money like Imelda Marcos in a Nike store.

Chart-wise, SPX did test the red support line and it held, so far:

Near-term, SPX seems to have widened its uptrend channel.  Bears would need to sustain a breakdown there to start things moving in their direction:

Beyond that, not much to add to Wednesday's update.  Trade safe.

SPX and BKX: Visualize Whirled Peas

The past few updates prognosticated that the market still had farther to run on the upside, which has proved out -- but the next upside target (from Jan. 23) was captured, so it's "wait and see" for a minute now:

I want to keep the bigger picture in the forefront of our memories unless and until bulls can demonstrate that they have the firepower to keep this (I want to say "charade" -- is that wrong and can you blame me?) going.

INDU can run higher, and very well may, but worth knowing that it's now done what it needed to do for the rally to complete any time it's ready:

Same with BKX:

In conclusion, SPX has captured its next upside targets and could thus embark on a correction if it so desires.  Not a lot in the way of targets yet as any correction may or may not be short-lived, but the long-term red line is probably worth watching.  I also don't want to imply that a major top is imminent, as this could run higher for a while first; I'm just pointing out that a top is possible any time it's ready -- but we'll watch for impulsive declines to signal that.  Trade safe.

SPX, BKX, COMPQ: Credit Delinquencies Rise with the Market

Last update noted that it was "still bulls' ball" and SPX made another new high since then, but appears to have done so in three waves so far.  This means that even if it drops a bit immediately, it will probably need to head back up and resolve that imperfect high shortly thereafter:

COMPQ continues to have the same appearance in that regard, but at a slightly larger scale:

Last update showed data indicating that the "bull market" since 2022 has been very narrow, largely being driven by only 7 stocks (AMZN, TSLA, NVDA, MSFT, GOOGL, AAPL, and META), and a look at the chart of, for example, BKX confirms that bank stocks still remain heavily depressed from the 2022 highs.  This chart also serves as a reminder that it's still quite possible for this party to be relatively short-lived.

Another interesting bit of data shows that while mortgage delinquencies remain very low (in keeping with my April 2022 thesis that the fundamentals do not support a "housing crash" anytime soon), delinquencies on credit cards and auto loans have been rising steadily since 2022.

In conclusion, bulls still appear to have more new highs on the horizon one way or another, but whether all this is going to be a (relatively) short-lived celebration remains to be seen.  Trade safe.

SPX and COMPQ: Still Bulls' Ball

As I mentioned a few days ago, COMPQ continues to look pretty good for bulls to keep the ball over the near-term:

SPX met noted resistance and broke down briefly but is threatening to regain its melt-up channel.  Bears will need to sustain a breakdown there to get anything going for the near-term:

Here's (or "here ARE," as some Latin purists might argue) some interesting data from JP Morgan:

As we can see above, if we were to remove AAPL, AMZN, META, MSFT, GOOGL, NVDA, and TSLA from SPX, then SPX would still be in a bear market.  That's pretty incredible, as it suggests that most buy-and-hold investors are still in the hole vs. the 2022 highs.  This has, so far, been a pretty narrow "bull" market.

That's about it for today.  Trade safe.

SPX and COMPQ: Little to Add

Last update discussed that, due to the apparent three waves up in COMPQ, it appeared that bulls would continue to control the ball one way or another, and so far, they have.

SPX is in a melt-up channel, as long as that persists, bears are out of luck.

There's just not much to add to the last few updates.  Trade safe.

SPX and COMPQ: Eat Your Crow. There Are Starving Children Who Would Be HAPPY to Have Some Crow

The big news from Friday is that SPX made a new all-time high, thereby resetting the long-term bear counts to zero and proving my long-term lean from early 2022 (which was for a big bear market -- I was right on the timing of the top and about "a" bear market, but not about it being "the" bear market) to be premature.

While it would not be unreasonable for the rally to continue a while longer, given that the rally from the bear market low is shaping up to look like five waves, I'm not sure the new all-time high will, in distant hindsight, be anything for bulls to cheer about.

COMPQ does suggest that, while a correction here isn't out of the question, there's probably at least a bit more upside left before bears can get a new intermediate trend going:

So, I was wrong about the BIG bear beginning in 2022, and while 2022 was a good year to be a bear -- and in 2023 I made some pretty solid near-term calls -- overall, that belief led me to lean the wrong way during a few key points of the rally of 2023.  For that error, I apologize.  

The good news is that now those counts are completely reset, so I can look at the charts "fresh" each day, so to speak.  Trade safe.