A Credit Crisis Is Brewing

July 11, 2022

This is not making headlines, but it should be. What impacts China impacts the world.

PRE-OPEN MARKET COMMENTS MONDAY – The S&P 500 will start the week off on a sour note and we are giving back some of the gains from Friday. The market is in a down trend and the bounce the last two weeks feels good. Unfortunately, it has come on extremely light volume and that is a sign that the conviction is low.

I believe that we still have work to do on the downside. Earnings season will kick off this week. That could be good or bad. Analysts have been lowering estimates so the bar should be easy to hurdle. Profit margins will be hurt by supply disruptions and higher input costs. Those supply disruptions won’t end anytime soon. China is initiation another lock down and the Omnicron BA.5 variant is spreading quickly. Casinos in Macau have been closed.

I have mentioned in the past that the market can weather inflation, higher interest rates, recessions and wars. The greatest threat for a sustained market decline is a credit crisis. Since 2021 I have been closely monitoring China and I believe they are on the verge of a credit crisis. Analysts have flat out accused China of misreporting economic data and they have evidence of it. Real estate developers are defaulting on loans and now we have a new crack in the dam. Chinese banks have placed limits on withdrawals to prevent a “run”.  https://www.businesstoday.in/latest/world/story/china-places-restrictions-on-large-cash-withdrawals-amid-rising-npas-bank-runs-263600-2020-07-09

This should be the biggest headline for every major news outlet, but it is not. No one wants to predict that the sun is going to explode or that China could be headed for a credit crisis so they don’t report it. Can you imagine the coverage if US banks were restricting withdrawals?

I believe that the market bounce will be temporary. The Fed will hike rates 75 basis points and the CPI is expected to hit 1.1% this week. Then they will suggest another round of tightening in September when they return from recess. Politicians will flee DC in August and the country will be left on “auto pilot”. This will make investors very nervous. During those two months, new data points will be revealed. Asset Managers will need to see strong economic releases or the bid will crumble. During that time we will also see of the news from China worsens.  

Swing traders should remain in cash.

We’ve had a couple of weeks of nice bullish price action and tech stocks are participating. Unfortunately, this bounce has come on light volume. I will be looking for signs that this bounce is stalling out. The news from China is very unnerving. I continue to focus on day trading, but strong selling pressure (stacked red candles) and a weak close might prompt overnight shorts. The game plan remains the same. Wait for the first 45 minutes and get a sense for market direction. Use the 1OP cycles as a guide.

Support is at SPY $385 and resistance is at $391.

SPY is in a down trend and the bounce came on light volume. That is a sign of low conviction by buyers.

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