Monday Mandarin Manufacturing Meltdown

Oh no, there goes China again!  

This weekend it was more horrific PMI numbers out of China as January manufacturing activity contracted at its fastest pace in 3 years, suggesting the world's second largest economy is off to a weak start in 2016 (and adding to the case for near-term stimulus).  The official Purchasing Managers' Index stood at 49.4 in January, compared with the previous month's reading of 49.7, below the 50-point mark that separates growth from contraction on a monthly basis. It is the weakest index reading since Aug, 2012 and below the median 49.6 forecast from a Reuters poll of leading economorons.

The PMI marks the sixth consecutive month of factory activity contraction, highlighting a manufacturing complex under severe pressure from falling prices and overcapacity in key sectors including steel and energy.  "The electricity production remained sluggish and the crude steel output continued the weak trend in January, reflecting an ongoing deleveraging process in the industrial sectors," said Zhou Hao, an economist at Commerzbank.  "In the meantime, China has started an aggressive capacity reduction in many sectors, which could add downward pressure on the bulk commodity prices over time."

 China's slowdown has sent Korea's eports plunging at the fastest rate since Aug, 2009, down 18.5% in January and now the 13th month in a row of declining exports.  Imports fell 20.1% - spreading the contagion further to other trading partners.  South Korean data are viewed as a proxy for the global trade picturebecause of the Asian nation’s heavy dependence on imports of raw materials and exports of goods such as cars and phones. The Korean data also give a reading of the health of the Chinese economy because around a quarter of South Korea’s exports are sent to China.  

All this bad news out of Asia (Japan's PMI also negative) has sent oil crashing back to Earth, back to $32.23 this morning after topping out at $34.50 on Friday.  As I said to our Members in Friday's Live Chat Room (2:44):

I think oil is still up in hopes that the false rumor re. a production cut is going to be somehow supported over the weekend and, in any case, that doubt is enough to keep the bears at bay into the weekend.  When nothing actually happens over the weekend, we should sell off and, again, there are still 40M barrels of Iranian crude in ships on their way to various ports around the World to flood inventories for the next few weeks.  So I certainly don't like it long but, unless it tests $34 again – I'm not going to play it short.  

Now we can set our stop at $32.50 and lock in $1,500 per contract profits.  We'll be doing a Live Futures Trading Webinar this Wednesday (1pm, EST) and, if you aren't a Member and don't want live trade ideas - we'll have a replay available later in the week.  During last week's Webinar (replay available here), we ended the session with 2 long Dow Futures contracts (/YM) at 15,969 and we closed on Friday at 16,371 for a gain of $2,010 per contract ($4,020 on 2) - not bad for 2 days' work!  

Of course, it was more complicated than that as we exited, as planned, with our $250 per contract gains, but, of course, we updated our position pre-market, in Thursday's post where we went long again at Dow (/YM) 15,900, Nasdaq (/NQ) 4,150, Russell (/TF) 1,000 and Nikkei (/NKD) 17,100 as well as Gasoline (/RB) at $1.0335.

  • Nasdaq Futures finished Friday at 4,273, up 123 points paying $20 per point ($2,460) per contract
  • Russell Futures finished Friday at 1,035, up 35 points paying $100 per point ($3,500) per contract 
  • Nikkei Futures finished Friday at 17,900, up 800 points paying $5 per point ($4,000) per contract
  • Gasoline Futures finished Friday at $1.13, up 0.965 paying $420 per penny ($4,053) per contract

I also called Apple (AAPL) grossly undervalued at $94 and it shot up past $97, which is a nice 3% gain if you are into playing straight stocks but we teach our Members to fill their toolbelts with stock, options and futures plays so they can make the right play for ANY kind of market conditions.  Remember the famous Chinese saying:  "If all you have is hammer - every problem looks like a nail."  Lack of having the right tools is why most traders languish in volatile markets! 

Speaking of tools, hedging is a very important tool we teach to our Members and we went bullish into the weekend because we had a nice buffer from Friday's window-dressing but now we'll see what's real as all we have so far are the weak bounces we predicted for you last Monday.  If they begin to fail (see post for those lines) we'll be revisiting some of our disaster hedges (see older posts or our Member Portfolios) and this week, we will be satisfied with nothing less than strong bounce lines (in our Futures) at:

  • S&P 1,950 

  • Dow 16,550

  • Nasdaq 4,340 

  • Russell 1,050

  • Nikkei 18,200 

We need to see those levels taken and held to take this rally seriously but if ANY of our weak bounce lines fail - we will need to add a hedge, like the Ultra-Short S&P (SDS) trade idea we discussed last Monday that made us 467% on cash in 54 days into the previous dip.  There's a tool EVERY trader needs to have because setting aside just 1% of your cash in a hedge like that can protect your entire portfolio against a 5% dip in the market!

Notice on our Big Chart that the Nasdaq is over the +5% line but only the Nasdaq and S&P are over their Must Hold lines.  Must Hold is the level we MUST hold to remain bullish and we need the Dow to at least get another 254 points by Wednesday or this can turn ugly fast.  The Nasdaq has a serious test at the 20 dma at 4,276 so we'll watch that closely and the S&P is right on the +5% line, so no slip-ups there but, then again, Mondays are meaningless so we'll check in tomorrow and do the serious work.

It's not a very big data week until Thursday, when we get Consumer Comfort and Factory Orders and Friday is the Big Kahuna, Non-Farm Payrolls - so we'll have to work on Friday this week!  One 3 Fed speakers and none likely to go off script so, once again, it's all going to be about earnings and we've got a ton of them including these heavyweights, starting with GOOG (Alphabet) this evening :

Get ready for an exciting week of trading!