Great Balls of Fire
February 27, 2007 -- As I've so often said -- "After the calm comes the storm."
Yesterday the Shanghai Stock Exchange Composite suffered its biggest loss in a decade -- down about 9%. The Chinese government has been warning that it would slow China's furious rate of growth. Bank reserves were contracted a few times, the Chinese central bank stepped on the brakes. The result -- a major smash in Chinese stocks. It was a crash heard 'round the world.
If China slows down, China's enormous export of goods will slow down. China's huge use of commodities will slow down. The activities of 1.3 billion Chinese people will slow down. How much of a change the nine percent drop in Chinese stocks will bring on, remains to be seen. Some see it as merely a temporary warning, a "gut-check." Others take it more seriously. My opinion -- major bull moves don't tend to end this way. Major tops entail weeks, more often months, of distribution. I haven't seen the signs of steady distribution yet. I've seen overvaluation, over-speculation, over-optimism, ignoring of risk -- but I have not yet [seen] the signs of distribution.
It used to be said that when the US sneezed, the rest of the world caught a cold. And I wonder, has that changed? Is it China that has now taken the US's place? When China coughs, is the rest of the world in trouble. Hard to believe, but that may well be the case today. Below, a daily chart of FXI, the "China 25 Index Fund."
The Dow has now declined five days in succession, which, on the face of it is not good. What interested me more, however, was the huge 122 drop in the Transports, followed by another Watusi 170 point drop today. That's a monster 272 point loss in the carriers within a two-day span. My PTI weighed the results, and it came up with a plus 2 yesterday. But today the PTI was down 6.
Yesterday, I drew attention to one phenomenon that I didn't like, and that was the sudden "waterfall" decline in Merrill Lynch. When trouble lies ahead, it's sensed early on Wall Street. Yesterday, Merrill plunged again on even bigger volume, and today marks the third down day. Now Merrill has been joined by giants Morgan Stanley and Lehman. And great balls of fire, even the king, Goldman Sachs, has been whacked and whacked hard. This action from Wall Street's "Master's of the Universe" can't be good. At least, I don't think it can. Note the explosion of volume as these stocks go down.
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