Stocks finished lower Thursday after a dramatic overnight plunge on the Shanghai Stock Exchange — the epicenter of an epic market bubble encouraged by the communists in Beijing. Prices dropped 6.5% in what was the first decline since May 18 and the largest decline since January.
There were a few catalysts; from the People’s Bank of China draining liquidity via repos to speculation that more brokerage firms are tightening margin lending rules. China’s massive debt binge, overinvestment and now a reliance on a debt bubble feels like a repeat of what Japan did in the 1980s only on a much larger scale.
In the end, the Dow Jones Industrial Average lost 0.2%, the S&P 500 lost 0.1%, the Nasdaq Composite lost 0.2% and the Russell 2000 lost 0.1%.
Retailers continue to release results, with Abercrombie & Fitch Co. (NYSE:ANF) rising 13.5% after noting comp-store sales are likely to continue to improve into Q2. Costco Wholesale Corporation (NASDAQ:COST) fell 0.8% on a 1% drop in company-wide comps.
Crude oil rebounded from weakness as the market responded to a larger-than-expected inventory draw. Still, the medium-term trend is down as supply looks set to ramp up again. An OPEC report out earlier in the day suggested that production would keep growing through 2017 when U.S. shale producers resilient despite lower prices.
Separately, there were headlines that state-owned Saudi Aramco would continue to increase the number of drilling rigs deployed if the oil price recovery lasted — indicating Riyadh could be aiming for another, more pushing, drop in prices in an effort to recapture market share from U.S. producers. I’ve recommended the ProShares UltraShort Bloomberg Crude Oil (NYSEARCA:SCO) to Edge subscribers in response.
Aside from this, there are ongoing mixed headlines out of Greece as the June 5 deadline for the $1.8 billion debt payment to the International Monetary Fund approaches.
The risk is rising of a “Graccident” whereby a short-term default could unleash a wave of bank runs and a loss of confidence that will be hard to control. Deutsche Bank analysts put the odds of a Greek default at 70%, with a 40% of the harder no agreement/no payment scenario that could unleash the ire of the European Central Bank.
The IMF’s Christine Lagarde raised some eyebrows when the German press reported her as saying a Greek exit from the eurozone was a possibility. Her spokesman tried to later walk back the comments, but couldn’t remove the impression that we’re nearing a climax in the multiyear crawl towards a resolution on Greece’s austerity policies and debt load.
As a result of all this, the iShares MSCI Emerging Markets Index (ETF) (NYSEARCA:EEM) is falling toward its 200-day moving average for the first time since early April — potentially removing a big source of enthusiasm for risky assets over the last few months (at a time when U.S. stocks have largely been rangebound).
Turning to the U.S. economy, April pending home sales rose to a nine-year high as the spring buying season heats up in a big beat to estimates. The National Association of Realtors indicated that foot traffic is increasing despite inventory shortages in many areas.
Technically, the situation remains very vulnerable with stocks mired in a tightening trading pattern amid an ongoing deterioration in breadth measures and lofty investor sentiment. Watch for a decisive break below Dow 18,000 on the rising likelihood of a messy resolution to the situation in Greece — which will in turn boost the dollar and further weigh on both crude oil and energy stocks.
Edge Pro traders are prepared with their June $87 puts against Exxon Mobil Corporation (NYSE:XOM), which are up nearly 50% since recommended on May 19.
Anthony Mirhaydari is founder of the Edge and Edge Pro investment advisory newsletters.
