Can U.S. Stocks Survive as China Crumbles?

Welcome to August trading, where the gains don’t last and only crazy headlines matter.

It was a frustrating scene on Wall Street Wednesday morning as an abrupt pullback vaporized this week’s gains. Weakness throughout emerging markets is beginning to weigh on U.S. stocks, scattering the bulls and taking a big bite out of the major averages.

The Dow finished the trading day down nearly 140 points, while the tech-heavy Nasdaq Composite slipped more than 1.2%.

The risk-off trading day took the wind out of several of our bullish themes. Retail stocks retreated from breakout levels after Macy’s Inc. (NYSE:M) reported disappointing earnings. Meanwhile, small-cap stocks struggle to stay above water as the Russell 2000 lost more than 1.25% by the closing bell.

Chipotle Mexican Grill (NYSE:CMG) was our only recent trade to buck the trend. The stock popped nearly 7% on an analyst upgrade, making it the best performing name in the S&P 500 on the day.

As I noted Wednesday morning, futures tanked as the Turkey currency crisis once again bubbled back onto the front page. But that’s not the whole story. Bloomberg even claims that investors are looking for contagion in all the wrong places.

A major contributor to emerging market weakness yesterday was, in fact, a nasty earnings miss from the Chinese tech firm Tencent Holdings Ltd.

“Tencent’s unexpected drop in quarterly profit and reports that Chinese regulators have frozen approval of game licenses has MSCI Emerging Market equity futures selling off more severely Wednesday morning than they did Friday during carnage in Turkish assets,” Bloomberg reports.

While the U.S. tech trade remains resilient as fears of a global economic slowdown intensify, we can’t say the same for Chinese tech names. Chinese stocks were running hot alongside their American counterparts during the January melt-up rally. But many of these names have failed to stabilize since the winter correction.

New Lows

The consequences have been severe. Both the iShares MSCI Emerging Markets ETF (NYSE:EEM) and the iShares China Large-Cap ETF (NYSE:FXI) are now sitting on double-digit losses year-to-date.

Just a couple of months ago, Chinese names listed on American exchanges were some of the fastest-moving stocks on the market. Despite the endless trade war rhetoric dominating the airwaves, China ADRs offered up some amazing trading opportunities for anyone who could stomach the volatility. Not anymore.

iQIYI Inc (NASDAQ:IQ) — China’s most popular video streaming service that just debuted on the Nasdaq this spring —more than doubled in just a month. Now this stock and many other recent Chinese IPOs are struggling to catch a bid. Momentum traders have completely abandoned these names.

With the carnage in China and other emerging markets grabbing headlines this week, you might be tempted to head for the hills. But remember, it’s August — a month of notorious whipsaws and false moves. Also, we’re not seeing any real signs of contagion right now. In fact, stocks are quickly recovering from yesterday’s swoon.

A major earnings beat courtesy of Walmart (NYSE:WMT) is helping lift Dow futures higher this morning by nearly 200 points. Asian and European shares are also bouncing today. So far, yesterday’s quick volatility pop is beginning to wane.

Our best move now is to stay the course and not get too caught up in daily market moves. The last thing we want to do is overreact to what could turn out to be some temporary market weakness.


Greg Guenthner

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Greg Guenthner

Greg Guenthner, CMT, is the editor of Opening Bell Fortunes and Seven Figure Signals. He has been with Agora Financial/Seven Figure Publishing since 2005. In 2019, the average position in Greg’s Sunrise Fortunes portfolio outperformed the S&P 500 by 1.65x.

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