China closed its exchanges twice last week when the drops hit 7%. The Shanghai Composite Index (SSEC) is down 15% in 9 trading days this year alone. It is down 41.8% from its June 12, 2015 high…7 months!
Yes it did bounce today. But one day does not a bottom make. Look at the bounces on January 5th and 6th. Look at the bounces in the decline during June to July.
Intra-day today the SSEC approached the August lows but did not break through it. Do I think it will hold? I doubt it. The China Large Cap ETF (FXI) did not hold its August lows. The China breakdown continues. See the chart below.
The FXI is down 12.7% in the first 8 trading days of this year. And it is down 41.5% from its high close on April 27, 2015…8 1/2 months! So the FXI peaked before the SSEC and broke the August lows before the SSEC.
Devaluing the Yuan
This is definitely unsettling for global equity markets but what is really unsettling is the devaluing of the yuan. China is trying to stimulate demand as I discussed in my post on the Baltic Dry Index.
Our markets are currently very oversold so we should get a bounce. But this is not the end of it. The market has, and continues, to drop stocks 6-10% and sometimes 15-20% and more without hesitation. This hasn’t happened to our indices…yet.