Are We In the Eye of the Fear Storm?

U.S. stocks enjoyed a low-volatility grind higher during the Chinese stock explosion, so should we really worry about China's recent selling spree?

by Adam Warner

Published on Jul 9, 2015 at 9:41 AM

If there was any doubt we're in a Fear wave, well, I bring you this screenshot I took from MarketWatch mid-morning yesterday, before the Big Board halt:

150709Warner1

For a more level-headed take on China, I bring you Michael Santoli from Yahoo! Finance: 

"It's interesting that the bear assault on China shares has merely dropped the benchmark CSI 300 index -- roughly tracked by the ETF under symbol ASHR -- to levels it first reached on March 16. It so happens that the American S&P 500 (GSPC) traded that day at 2081 -- exactly where it closed on Tuesday. 

Yet in the interim, the Chinese market surged 46% into its June high before collapsing by 32% since. The S&P, over that same time barely budged -- rising a mere 2.3% to its high and then slipping around 3%. In the eight months before the CSI 300 and S&P 500 got to those March levels, the China index had soared 68%, and the U.S. index just 6%. 

So if the U.S. market never caught the benefit of the explosive surge in Chinese equity-market values, why would the violent unwinding of this overheated rally matter terribly much for American investors -- who generally aren't significantly invested in the mainland market?" 

He points out that no one is saying that this or Greece don't matter. Rather, it's more one of degrees. We treat each successive story like it's The Biggest News Ever, and will be that way until the end of days. And inevitably, it fades and we freak out about something else. Or not. Mostly not.

The real key is rarely the actual news or expectation of news, rather it's the market backdrop. And right now we're in the midst of a major Fear Blast. In fact, the CNN Fear and Greed Index indicates we're still in "Extreme Fear" mode, and have been for at least a week.

Unlike MarketWatch, I have no clue how China will play out. I would note, though, that counter-trend intervention never works. If Chinese authorities want to prop everything up, they should stop bidding now and then wait for the swoosh and start buying on the way up; they'll beget a panic buy wave. Buying into a panic just causes an increase in the panic, and shutting trading off in shares completely just makes it worse.

The rational case for this mattering enormously here doesn't really add up. I'm not saying it's something to ignore -- I mean, the volatility alone is jaw-dropping. But economically? Did a couple months of low-cap foreign shares in a clear bubble cause such a wealth effect that analysts started raising estimates on our internationals? Were shares flying on predictions of a faster-growing Chinese economy and are those predictions now off the table thanks to the stock crumble? I really doubt it. As Santoli noted, we didn't exactly follow them wildly higher; the Chinese stock explosion coincided with a low-volatility grind higher here. 

So I'll guess that we get a washout in China shares then an explosive rally, and we'll obsess over every tick there for a couple weeks… and perhaps wash out our own mini-wave of ugliness. 

And then we can start fretting in anticipation of the Scariest of All News Events: The Possibility That the Fed Hikes Rates in September. I predict that MarketWatch has only this on its front page that day:

150709Warner2

 

Disclaimer: Mr. Warner's opinions expressed above do not necessarily represent the views of Schaeffer's Investment Research.


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