Are The Markets About To Get Shanghai'd Again?

Authored by Mark St.Cyr,

As we sit here on Wednesday the “markets” appear to be recovering from yesterday’s rout in both the U.S., as well as Europe. e.g., Italy and its contagion fears. Many across the mainstream business/financial media landscape are now waving their “all clear” pom-poms.

Whether this is true, in regards to Europe, is an open question at best. Yet, for the record, I think it’s anything but solved. Only contained, for the moment. But that’s for another article.

What I believe one should be focused on is not Europe – But China, and Shanghai in-particular. Here’s why:

Currently no matter how bad the circumstances may be in Italy at the moment, the ECB led by Mario Draghi are still in “Whatever it takes” mode.

Although the situation could go from bad-to-worse, at any moment. Until you get some immediate, catastrophic announcement such as a major bank failure (think Deutsche Bank™ as an example) sovereign styled risks (i.e., bonds et cetera) are immediately accessible for the ECB to “step in” as they say and shore-up a market. Of course, there’s always the caveat: “It works like a charm every-time it’s tried – until it doesn’t.”

When that “doesn’t” time is, is anyone's guess at the moment.

However, with the above said there is another market one should be paying close attention to. That market is the Shanghai Composite Index™. (SCI)

The SCI is one of those bellwether type indexes to watch when trying to gauge anything China market related. And what it is showing seems of little interest to most mainstream financial/business media pundits. Either that, or they have no real clue. I’ll go with the latter, but that’s just me.

So here’s something I feel one should pay the utmost attention to over the following days and weeks. The reasoning is quite simple: What happens in China will effect everything in the U.S. and world with near immediacy. Need I remind you of that morning in August, 2015 where the U.S. woke to its major markets in “Limit down” status?

Remember where it all started? Hint: China and in-particular the SCI. To wit:

(Source)

The above is a chart of the SCI and the candles/bars represent daily intervals.

As of this morning (or last night) the SCI has been sending signals that something is not quite right. The behavior via a technical eye seems to show it’s at the cusp of going into free-fall status. The 3000 level in this index is a very large psychological level much like our own Dow 20K, for an example.

If this level is lost and suddenly begins to fall precipitously, as well as with speed? 2015 type “market” fears, once again, may jolt “markets” globally.

The caution in such an issue, or “jolt” happening today, is for this reason: “It’s different this time” i.e., The Fed is currently in QT mode (quantitative tightening) mode and raising rates. So there’s even less in the “markets” as far as liquidity to help cushion any initial sell-off as what happened in 2015 – and – the Fed. coming to the rescue this time, may or may not, solve the underlying rout, only slow it down, for the moment.

Again, for anyone trying to pay attention as to what may be on the ever-changing horizon, I can only say this…

Italy may send the markets roiling, but Shanghai could close them. If you think that’s hyperbole? Then you, much like most of the business/financial media, have forgotten 2015.