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The Stock Market Drops as Emerging Markets Falter
Michael Kramer and the clients of Mott Capital own shares of NETFLIX
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On the surface, the damage looks mild with the S&P 500 down by just 40 bps. But don’t tell that to tech-heavy NASDAQ, because that was down by more than 1 percent.
It looks and feels like a fill the gap type of day, with the NASDAQ working to close a gap created on August 24 around 7,950.
Our latest member videos talk more about today’s action. All Hands On Deck, As Stocks Fall
We can see the same pattern playing out today in the S&P 500. Also working to fill a gap around 2,875.
Of course one can also see a similar pattern in the Technology XLK ETF.
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And stocks like Netflix.
Rotation
More generally it seems like a risk-off day, what specifically triggered that? Perhaps it was the testimony in front of Congress from Twitter and Facebook. Perhaps it was Workday’s uninspiring results. Whatever the reason, the sectors that performed the best were the staples (XLP) up more than 1 percent, and utilities (XLU) up by almost 1.5 percent.
Defensive Stance
It wasn’t an overly defensive day. The 10-year treasury yield was flat and the dollar slighter weaker. So perhaps it was a day of rebalancing. Who knows! Whatever the case, it is likely not the end of the bull market, and probably not the start of some broader correction.
China
I heard a lot of commentary about the emerging markets being a mess, and how suddenly China’s stock is down by 20 percent. Well, I am sure that China’s stock market has been down about 20 percent for some time now, and is actually in the process of forming a bottom.
Strong Dollar = Not Good
Besides such any of this be a surprise? A stronger dollar is not good for emerging markets or their stocks. It devalues local currencies making imports more expensive sparking inflation. It reduces the value of their exports, reducing revenue and profits. It hurts commodity prices, and it makes it more challenging for a local government to repay foreign debt denominated in dollars. Not exactly a great formula for economic prosperity. So as long as the dollar continues to strengthen, emerging market will continue to struggle in general. Throw in the trade war between the US, China, Canada, and Europe. Why would emerging markets be doing anything but go down? It seems obvious. Duh!
China’s stock market is a perfect example. The Chinese yuan devaluation has fallen sharply from 6.30 in April to 6.9 today. That was precisely when the big divergence between China and US equity markets started.
Oh and just about the entire complex.
Anyway. Hope it helps.
-Mike
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Michael Kramer is the Founder of Mott Capital and the creator of Reading the Markets.
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Mott Capital Management, LLC is a registered investment adviser. Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Investments involve risk and unless otherwise stated, are not guaranteed. Be sure to first consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed herein. Upon request, the advisor will provide a list of all recommendations made during the past twelve months. Past performance is not indicative of future.
#dollar #emerging #markets #china #sp500 #nasdaq #staples #technology #netflix