Markets slammed overnight after fear of a global slowdown intensifies

Quick Recap

Almost the very worst thing is happening in markets at the moment as the flow of trade from Asia, to Europe, to North America and back to Asia is reinforcing a negative feedback loop of concern and fear. Traders are looking for a circuit breaker but it is not yet clear where one might be found.

So, against this backdrop I would genuinely say that even though the Dow, S&P, and Nasdaq all fell close to 3%, in the Dow’s case it lost 470 points, it could have been worse. That’s because we are very close to what could be a capitulation of the bulls.  Or we could be about to find support…the jury is out but I’ll explain below.

First a recap – as I wrote at Business Insider this morning:

Looking at the last 24 hours globally we’ve seen:

• Weak Chinese data, including the NBS PMI “admitting” the manufacturing sector is contracting;
• In Europe we saw a raft of European PMI’s a little weaker than expected;
• US PMI’s were likewise weaker; and
• IMF managing director Christine Lagarde said she sees weaker than expected growth ahead.

It’s hardly surprising then that oil has tanked (although there was evidence of a big stock build), stocks came under heavy selling pressure and the  Aussie dollar is getting crushed once more.

It sets up another tough day for stock traders in Asia and Australia. Overnight the ASX SPI 200 futures for September were down 69 points to follow on from yesterday’s more than 1% loss.

Traders and investors will be getting genuinely fearful this is the start of the down move most feel is due, has been due, for some time. But all is not lost. Let me explain with reference once again to what I wrote at BI this morning,

Donning my trading hat and thinking back over the past 25 years, it is still fair to say that for all the bearishness all is not lost yet. Even though I wrote the risk of a big move was growing and said  in my Go Markets Asia report yesterday, “I would say this is a truly a bad day for global markets — if what we have seen in Asia today kicks off around the world, it is an IF of course, then we have the pre-conditions for a crash, a proper one brewing,” what is happening in markets is the type of price action that always happens in volatile markets, when we’ve seen the types of moves that traders have just experienced.

If I can summarise. We had a pessimistic crescendo at the low on stocks last week. That set up the rally, which then satisfied usual (my) trading targets for that bounce. Typically we then see another pullback to retest the strength of the buying which is where we are now. It’s trader/investor psychology that manifests in price action. Fear gives way to hope, fear gets another look and how things play out from here set up the next move — either a deep pullback or the establishment of a base under markets.

So we wait and see…Today’s chart of the day uses the S&P 500 as an example.

The overnight scoreboard (7.14am AEST):

• Dow Jones -2.84% to 16,058
• Nasdaq -2.94% to 4,636
• S&P 500 -2.95% to 1,914
• London (FTSE 100) down 3.02% to 6,059
• Frankfurt (DAX) -2.37% to 10,016
• Tokyo (Nikkei) -3.84% to 18,165
• Shanghai (composite) -1.28% to 3,165
• Hong Kong (Hang Seng)-2.24% to 21,185
• ASX Futures overnight (SPI September) -68 to 4,990
• AUDUSD: 0.7011
• EURUSD: 1.1317
• USDJPY: 119.27
• GBPUSD: 1.5304
• USDCAD: 1.3243
• Nymex Crude (front contract): $44.23
• Copper (US front contract): $2.2930
• Gold: $1,139
• Dalian Iron Ore (September): 465(denominated in CNY)
• US 10 year bond rate: 2.16%
• Australian 10 year bond rate: 2.64%

On the day – Aussie GDP day

On the data front today the Q2 GDP is out at 11.30 AEST. The market has coalesced around a 0.5% expectation for the quarterly growth rate. Tonight in Europe we get EU PPI and then, in the lead up to non-farm payrolls on Friday, we see the release of the ADP employment change data in the US. The Fed’s beige book is also out and ISM New York.

CHART OF THE DAY: The S&P encapsulates everything that is happening in markets right now

We’ve had a huge sell off. Then we had the recovery and now, the S&P 500 (and many other markets) has sold off again over the past few days.

That is not unusual. It’s fear, hope and fear – traders emotions – captured in price action.

So we are now in a position where the buyers are either going to come in in front of last week’s lows or are absent and the bears take control and pump the S&P and other markets with the same type of price action and structure lower.

Even though I’m in the sell the rally camp, not the buy the dip one, I’m agnostic as we head back toward the lows. For all I know that could simply be the bottom of what might become a base of sideways market as the base builds after the recent pessimism.

But, if the bears have it and prices move down and through then the chance of a big dip intensifies.