Date: July 27, 2015

China Again

A few weeks ago, I published a piece about the Shanghai having further to fall. Chinese Market Collapse Not Over

Last night, Chinese stocks saw their largest decline since February 27, 2007, a day I vividly remember as I was running money for a hedge fund in Boston and about to leave for a week’s ski vacation in Utah to celebrate a belated 40th birthday with a bunch of friends. At that time, the prevailing sentiment was that the Asian Flu was cause a 15-20% stock market correction was taking hold in the U.S. I vehemently disagreed and argued for fresh all-time highs over the summer as major corrections typically don’t begin with such volatility and fanfare.

Today, we have another huge rout in China. Our market looks weaker than it did in February 2007, but I still don’t believe the bull market has ended just yet. It is, however, living on borrowed time and the next new high will have to be scrutinized very, very closely.

U.S. stocks are getting short-term oversold and a counter trend rally shouldn’t be far off. This should be a rally to sell into rather than buy, but we’ll analyze that if and when some strength develops. For now, keep an eye on the sector leaders in healthcare, biotech, housing, financials and consumer discretionary. If the major indices see accelerated selling, I would expect the leaders to have a quick and very sharp bout of strong selling that should result in another buying opportunity. On the other hand, it would be concerning if these sectors began to underperform.

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Paul Schatz, President, Heritage Capital