China in Trouble

The Chinese yuan is getting punished along with the Chinese stock market.  China has topped out and they have started an easing cycle in earnest.  This is the first stage of a popping of a massive credit bubble.  The stock market goes down, underperforming global equity indices, and then the central bank tries to put out the fire with a hose of liquidity.

We haven't seen a divergence this wide between the Shanghai Composite and the S&P 500 performance since the A Shares bubble popped in 2015.  

And when the central bank eases, you will see the currency react, and the Chinese authorities are keeping their powder dry, learning their lesson from 2015 when they used up a huge chunk of FX reserves trying to slow down the fall in the CNH.  Now, they are letting the yuan go where it wants to go, which is much lower.  And you can't just blame it on a stronger dollar, because the dollar has been trading sideways for a month and the yuan keeps going down.  

The US stock market is ignoring China for now, but for how much longer?  Back in 2015, it eventually caught up with the S&P 500, and you had a waterfall decline in SPX from 2100 to 1840 in a week during August 2015.   And that was a market with more reasonable valuations and a looser Fed than now.  Overall, its a much more bearish picture in 2018 than 2015, which probably means the decline coming up will be much bigger than a 15% decline from the top in 2015.  

I am getting more bearish as each day passes by at this price level, I am looking to put on a SPX short any day now, with a finger on the trigger.