Daily Commentary: August 15, 2023

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August Nervous Jitters Are Rising

Posted by Peter Stolcers on August 15

Credit concerns spark selling.

PRE-OPEN MARKET COMMENTS TUESDAY – Hi traders… I’m back after some much needed time off. August is typically a low probability trading environment with a negative bias and so far it has not disappointed. The S&P 500 is down 30 points before the open today.

It is going to be difficult for global markets to rally when China (the world’s second largest economy) is struggling. The number of property developers who are missing bond payments continues to increase in spite of China saying that it is going to provide support. Demand for properties is decreasing. Commercial development accounts for 20% of China’s economic activity. The unemployment rate for the 16-25 year old range is at 25% and a large percentage of them have college degrees.  China will no longer report this employment statistic (because it is so bad). The expected rebound after the country reopened never materialized and last night the PBOC lowered rates (.15%). This has raised concerns that their growth could be in dire straits. China reported that industrial production increased by 3.7% and retail sales increased by 2.5% (both weaker than expected). For over a year I have been pointing to China as a potential problem for the market and the threat of a credit crisis is increasing there.

Domestically, bank reserve requirements have been raised and the Fed is making sure that US banks have ample reserves. Fitch reported that it might have to downgrade the credit rating for dozens of banks including JP Morgan Chase.

Credit concerns can surface quickly and it can lead to swift market moves. Debt levels across the spectrum (consumer, municipal, state, and sovereign) are at historic highs with no signs of it ever improving. Money printing can and will continue and the “house of cards” is in peril every time the wind blows.

It’s August and this is typically when the market gets nervous. The Fed is in recess and no one is minding the shop. Mega cap tech companies have reported and short sellers will be more aggressive. After a strong rally this year, we are also likely to see some profit taking. Asset Managers looking to buy can see the price action is soft and they will be passive because they feel they will have a better entry point.

The market found support yesterday and it rallied above the AVWAPQ yesterday. The drop today will provide an excellent read on who is in control.

A drop followed by stacked green candles with little to no overlap on good volume will indicate that buyers are interested at this level. That would lead to a gap fill and a bullish gap reversal. I view this scenario as less likely because of the magnitude of the overnight move (-30 points) and the selling pressure overseas.

If the market drifts lower from the open it will start to challenge support levels. SPY $446 and $442.50 are important and if they fail with ease we have enough weakness to consider overnight shorts.

This will be a good day for day trading since we have a nice move on the open. I am favoring the short side here. Do not get overly aggressive with shorts. The market is testing support levels and this is where we can expect bounces. The trend has been higher and this could just be a normal pullback in a bull market. Don’t trade what you think is going to happen. Support is support… until it is breached convincingly.  

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