Monday Morning Musings

Markets are in global selloff mode, led by a big plunge in China overnight amid continued concerns about a credit crunch.  Bond yields are also on the rise again in the US, so there is no safe haven benefiting from the selloff today.

The credit concerns in China unnerved markets.  Basically, China is trying to curb its excessive credit growth.  So the PBOC doesn't want to step in too quick.  It is basically telling banks to manage their cash better and suggested that liquidity levels are appropriate.  But this did little to stem a -5.3% plunge in the Shanghai Composite, the biggest drop in almost 4 years.  Goldman Sachs also cut their growth estimates for China GDP to 7.4% from 7.8% for this year.

Here in the US the continued rise in yields is also exacerbating the selloff that started overseas last night.  The yield on the 10-year T-note hit 2.65% this morning.  It has currently eased back a bit to 2.61%.  But bond funds, bond etfs, and closed end funds are also lower again on rate fears. 

The panic selling showed up in the volatility index this morning, with the VIX spiking +15% to 21.90.  It has also reversed lower for the time being, currently up 7% near the 20.25 level.  We wrote about the inability of the VIX to move back below the 15 level in the last couple weeks as a yellow flag for the market.

The dollar is a bit higher and commodities are all lower.  Gold prices are down near $1285 and oil prices are a bit weaker near $93.50.  Copper and silver prices are lower also.

Trading comment: The S&P 500 is now down -5.5% in just 4 days.  That is pulling the rubber band back a bit far, and we still think we will see some sort of quarter end bounce this morning.  But any bounce is unlikely to take the SPX back above its 50-day average, which means we will still be in correction mode big picture.  That means for folks who haven't lightened up at all you can use any bounce to get more defensive. 

We have been looking for a summer correction which looks to have started, albeit it a little earlier that we first thought.  It is impossible to know ahead of time how deep a correction will run and for how long.  So the goal is to get defensive enough that you can ride it out and be in position to take advantage of it when the market shows signs of bottoming.  But until then patience will be required.