It's Not China, It's the Economy

The consensus seems to be that "pressures by a big drop in the Chinese stock market" were behind yesterday's market plunge. The Shanghai's Composite Index [.SSEC] plummeted 9%, widely described as the "biggest decline in a decade."

Getting the blame? "Efforts by investors to cash in on big gains and avoid any government attempts to cool the markets." As a reminder, the Fed did not attempt to do the same in 1999/2000.

Now, the reason why the drop in China's benchmark stock index on fears of increased margin requirements should impact the U.S. or Europe is food for thought.

Quite frankly, I don't believe it's that.

What's more likely is the growing recognition that inflation remains "worrisome," that growth is slowing, and that the sub-prime mortgage housing debacle will no longer remained "contained."
The market is fortunate that sentiment levels are only frothy, and not completely exuberant. Also potentially containing this pullback: The support levels for the Nasdaq 100 (QQQQ) remain steady.

Two recent research pieces discuss these elements in detail: Our Sentiment Review, and the most recent update of the Nasdaq 100 Composite.

Both research pieces can be found at the site here.

Source: WSJ

If you want to believe that some bureaucrat in China, changing the margin requirements for local speculators, is the cause of the U.S. sell-off, then go ahead.

Me? I prefer to believe what is right before my eyes: Decaying economic fundamentals, a complacent market that is overbought and way overdue for a correction. Add to that the single biggest positive contributor to the economy over the past 4 years – Housing – showing no signs of being anywhere near a bottom. A few more jiggles on the screen, and there will be significant technical deterioration.

China? Yeah, I guess it's China . . .