The U.S. market has been on an uptrend since mid June. In fact, half of the losses from the June lows has been recovered.
Several positive signs have been showing with this upward momentum of the market, and it got many of us thinking if a new bull market has started again.
It's not surprising to think this way. After all, even some indicators are showing the tide has changed.
One, roughly 90% of the S&P 500 stocks are trading above their 50-day moving averages. If history is any indication, this might be the start of a new bull market. Similar situations have happened with the rebounds in 2009, 2011, 2018-19 and 2020, and we all know what happened next.
Two, even my favourite technical indicator is now green. For those who are regular readers, you might have known that consumer spending is one of my favourite indicators in understanding the market. Several articles have been written about it- here and here. It's basically comparing two ETF values (RCD- Invesco S&P 500 Equal Weight Consumer Discretionary ETF, RHS- Invesco S&P 500 Equal Weight Consumer Consumer Staples ETF). Whenever the ratio of RCD/RHS drops against its 70-day moving average, a crash is imminent. Similarly, a positive upward trend in the market is expected when the ratio of RCD/RHS rises against its 70-day moving average.
Since 29th July, the RCD/RHS ratio is now above the 70-day moving average and it has stayed above the moving average in Aug.
With all these positive indicators, I like to think that the market might be on a positive trend with the start of a new bull market. After all, the S&P 500 ends up eking out a gain in 1970 after plunging 21% in the first half of 1970 (sounds familiar?).
However, I can't help but notice something which might be brewing and is potentially devastating to the overall market.
That is the current dismal China economic situation.
It's certainly not a cosy situation in China in recent days. Several economic data have been rather alarming and calls for attention.
For instance, the dive in prices for commodities such as iron ore and copper have indicated weak Chinese demand. The most direct impact that weak Chinese demand can have on the rest of the global economy is through these commodities' prices. This is certainly not a good sign.
But this is not the most worrying sign.
The most pressing problem right now is the China real estate crisis. Housing prices have fallen for 11th straight month. There are currently a significant number of uncompleted housing projects. Many common people took mortgages for all these uncompleted projects. In a country where property prices could be 40-50 times the annual income of an individual, properties are essentially everything an individual has in terms of assets. In a rare act of defiance, property owners across more than 90 cities are now banding together to boycott mortgage payments.
And banks are caught in the middle of this turmoil. It's estimated that China banks may face mortgage losses of $350 billion in a worst case scenario. China's bank loans to the property sector have ballooned over the years. Already, there are two major banks- Postal Savings Banks of China Co. and China Construction Bank Corp with mortgage exposure exceeding the regulatory cap of 32.5%.
Real estate market could be said to be the fundamental layer of economic stability in China. The current potential mortgage loss from the real estate market is going to put a huge dent on the economic stability of China if the government could not react in time to keep the situation in check. Some said the situation has already started to get out of control and this mortgage crisis is a ticking time bomb.
With China being the second largest economy today, any meltdown in their economy is going to have huge repercussions across the global economy. It has the potential to bring forth an effect similar or even larger than we have seen with the collapse of Lehman Brothers.
When that happens, any technical indicator can be thrown out of the window.
Again, it might be foolish to time the market and I will not attempt to do so.
Hence, it's back to the same plan- regularly invest in the market in fixed time intervals and you should be able to do well in the long term.
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