Don't be lulled by dog days, risk remains

August 18, 2015 09:06 AM

Markets finally reverted to seasonality for August, it took long enough.

But as far as I’m concerned, nothing has changed. Chinese crash risk is still out there. Let’s be clear about one thing, China is no longer a freely traded market as important players and insiders are currently forbidden with the threat of prison hanging over their collective heads if they hit the sell button. The other condition you should know is there were about 105 trading days from the bottom of the 1929 crash leg to the next round in 1930. The way I understand the new rules in Shanghai there is a six-month window where hitting the sell button is forbidden.

But China is only one part of the story and there are several high value time windows taking place near the middle of September. That puts us less than 30 days away, so my view is if something is going to happen that is prime time. I’ve been telling you this for 13 months, markets statistically get in trouble after Labor Day so if for whatever reason we don’t get a serious selling wave from about Sept. 8 to about Oct. 20 we aren’t getting one. I don’t have a crystal ball but I will tell you the probability is greater than 50% something is going to happen.

I’ve also shared that our proxy comes out of Europe which I believe has already topped and more than likely leading an important correction to the downside. But we have something significant developing in the DAX, which is now 89-90 days off its very own high. It has wrestled with the 200-day moving average for a whole week with conditions very ripe for a bounce given the day the U.S. markets had on Monday. Watch the character of the bounce; it could be a dead giveaway.

At this point, I remain bearish the equity markets generally speaking as long as this chart remains below its ridge. Of course U.S. markets can and will present a non-confirmation and you will see good behavior like you did right here if for no other reason it’s the second half of August with some of the lightest trading volumes of the year.

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