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25Aug2015 Market Close: Markets Close Down Deep Into The Red After A Brief Run In The Green, Volumes Remained Subdued Indicatin Savvy Investors Were Expecting Another Fall

Written by Gary

The markets had a nice one percentage point bounce at the beginning of the session followed by sideways trading for much of the afternoon. The averages looked good until 3 pm when the bottom fell out and they started to slide and close. The large caps lost the most falling one percent while the small caps lost only a half percentage point. Oil fell into the high $38's after failing to penetrate the resistance at 39. At least one more test of the market lows is expected.

Todays S&P 500 Chart

History clearly suggests that 'relief' rallies after yesterday's tank are prone to failing and a retest of lows is common. Some sort of bounce was anticipated today due to the enormous losses inflicted over the past several sessions even though the American economy doesn't appear to be falling off a cliff. All three major U.S. equity indexes had plunged into 10% correction territory, the first serious decline from recent highs since 2011.

Oil was also trying to stage a comeback with WTI crude retaking the $39 level, but was unable to climb higher. Economists expect global supply will start drying up next quarter if oil stays below the $40 level.

After staging a rebound rally for most of the session, major averages reversed course late in the trading day, shedding significant gains. At the closing bell, the Dow Jones Industrial Average shed 205 points, or 1.29% to 15666. The S&P 500 lost 25 points, or 1.34% to 1867, while the Nasdaq declined 19 points, or 0.44% to 4506. All 10 S&P 500 sectors were in negative territory.

The Market in Perspective

Here are the headlines moving the markets.

Dow Plunges Back Below 16,000 - Dead Cat Bounce Dying

"Off The Highs" - hope is fading fast as The Dow is now down over 350 points from its pre-open highs after the China rate cut and has broken back below the crucial 16,000 level...

Charts: Bloomberg

Wall St. rally loses steam in afternoon trading

(Reuters) - Wall Street rallied on Tuesday as investors bought beaten-down stocks a day after fears about China's economy sent the market into its worst slump in four years.

China cuts rates, reserve ratio after stocks plummet again

SHANGHAI/BEIJING (Reuters) - China's central bank cut interest rates and lowered the amount of reserves banks must hold for the second time in two months on Tuesday, ratcheting up support for a stuttering economy and a plunging stock market that has sent shockwaves around the globe.

Global Stocks Break Multi-Year Neckline, What Happens Next?

Via Credit Suisse,

The MSCI World Developed index has seen its expected fall to pivotal price and "neckline" support at 1586/72. Below here would mark a medium-term top, and further weakness to 1400/1380.

S&P 500 September Contract

The S&P 500 fall extended below 1886/82 for a move to our lower target of trendline support April 2014 at 1832, from which a sharp retracement higher is underway. Above 1950/52 is needed to suggest strength can extend back to the price gap from Monday morning at 1967/71, but we would look for this to then cap, for a fresh turn lower again. Support shows at 1900 initially, then 1887, with a break below 1868 needed for a retest of 1832/31. Below here can target the 1814/03 lows of April and October 2014, loss of which would mark a larger top for 1732/27 - the 38.2% retracement of the 2011/2015 rise. VIX has needs to hold 37.10/00 to suggest the immediate risk can stay higher for a retest of the 50% retracement of the entire 2008/14 fall at 49.90.

Flat. Sell at 1950, stop above 1972, for a retest of 1832.

Above 1972 can see the recovery extend back to 2002, then 2028. ...

CBO says U.S. revenue gains push down deficit, delay default

WASHINGTON (Reuters) - The U.S. budget deficit is likely to fall by $60 billion in 2015 due to strong revenue gains, the Congressional Budget Office said on Tuesday, enabling the government to stave off default without a debt limit hike perhaps through early December.

Cutting Through The HFT Lies: What Really Happened During The Flash Crash Of August 24, 2015

One of the fallacies being propagated about yesterday's flash crash, is that somehow HFTs came riding in as noble white knights and rescued the market from a collapse instead of actually causing it. This particular lie is worth a few quick observations and explanations of what really happened.

What did not happen, is what Doug Cifu, the CEO of HFT titan Virtu, the firm which as we have profiled repeatedly in the past has lost money on 1 day in 6 years...

... told CNBC when he said it wasn't Virtu's fault the market did not work for anyone as a result of countless HFT glitches: "we don't cause volatility, as a market maker we're absorbing volatility and we think we soften it."

The most amusing bit was when Cifu said that "we're really just in the role of transferring risk from natural buyers to natural sellers." Considering Virtu and its "special sauce" has never actually taken on risk with its trading record, discussing risk is a little rich for the owner of the Florida Panthers, and here's why: in a note by Credit Suisse's Laura Prostic (the typos are because she is in S&T) we now know precisely what happened:

HFT is typically 50% of overall volm, but they have to walk a ...

Investors Turn to Euro in Times of Stress

Just a few weeks ago, the Greek debt crisis put the future of the euro in doubt. Now, it has become a go-to currency for investors in times of stress.

For Saudi Arabia, The Music Just Stopped: Scramble To Slash Spending Begins As Oil Math Reveals Dire Picture

Over the weekend, just as Gulf state stocks were in full-on meltdown mode, we outlined Saudi Arabia's increasingly precarious financial situation. The problem - which is at least partially of the kingdom's own making - can be visualized as follows:

As you can see, Saudi Arabia is staring down a fiscal deficit on the order of some 20% of GDP while the country faces its first current account deficit in over a decade.

The culprit, of course, is persistently low crude prices for which Saudi Arabia can partially blame itself. As we're fond of putting it, the country has "Plaxico'd" both itself and the petrodollar in an epic quest to bankrupt the US shale space, an effort which has been complicated by US drillers' access to capital markets which are of course quite forgiving thanks to years of ZIRP.

Now, with declining crude revenues clashing head on with the cost of simultaneously financing the state while intervening militarily in Yemen, the Saudis are looking to tap the bond market (a move which could increase debt-to-GDP by a factor of 10 by the end of next year) and some are speculating that the riyal's dollar peg could ultimately prove unsustainable.

...

China Eases but Stench of Crisis Remains

China's double-barreled easing shot also came with a serving of market reform.

Regulator Votes to Block Merger of Pepco and Exelon

The decision by a Washington regulator casts doubt on a merger that would create the country's biggest utility operator.

Is The Correction Over?

Submitted by Lance Roberts via STA Wealth Management,

As I discussed yesterday, the now "official correction" was not a surprise. It was something that I have been discussing repeatedly over the last several months. The only surprise was the magnitude of the opening drop.

The question on everyone's mind now is simply whether the correction is over, or is there more to come?

The honest answer is that no one really knows. The bulls are "hoping" that the worst is over and that the current bull market will resume its upward trend. However, there is ample evidence suggesting that something else may be afoot from slowing domestic and international growth, collapsing commodities and falling inflationary pressures.

Furthermore, from a fundamental standpoint, earnings growth is deteriorating, and valuation expansion has ceased. As I addressed in "Shiller's CAPE - Is There A Better Measure:"

"The need to smooth earnings volatility is necessary to get a better understanding of what the underlying trend of valuations actually is. For investor's periods of 'valuation expansion' are where the bulk of the gains in the financial markets have been made over the last 114 years. History shows, that during periods of 'valuation compression' returns are much more muted and volatile.

Therefore, < ...

Mapping China Contagion: The Flowchart

We know, we know, it's all about September and "liftoff" and that "diminutive" Atlas-like superwoman Janet Yellen, who holds the fate of the EM world in her media dissent-suppressing hands.

Be that as it may, if the last two weeks have taught us anything at all (other than that a Reg FD violation is called a "scoop" when it involves Jim Cramer and Tim Cook), it's that China quite clearly matters - and it matters quite a lot.

We've certainly been keen to document the various transmission channels whereby China's economic deceleration, stock market collapse, and currency deval have translated into a commodities collapse, an emerging market meltdown, and a Black Monday replay on Wall Street, and while we acknowledge the fact that because the situation is quite fluid, a Venn diagram is probably a better way to visualize the interplay between EM carnage, the yuan devaluation, the SHCOMP collapse, FOMC confusion, and commodities carnage, the following China contagion flow chart from RBS should help to provide some clarity on why it is the market seems to suddenly cares so much about China.

...

Consumer confidence, housing data signal economy's resilience

WASHINGTON (Reuters) - U.S. consumer confidence hit a seven-month high in August and new single-family home sales rebounded in July, suggesting underlying strength in the economy that could still allow the Federal Reserve to raise interest rates this year.

Germany's Fate Doesn't Depend on China

Germany's stock market has been badly beaten up by the global storm; its economy should prove more resilient.

Half Of Emerging Market Stocks Are Now In Bear Territory: The Map

We have, over the past two weeks, spent quite a bit of time documenting the veritable collapse of EM stocks, bonds, and FX in the wake of China's move to devalue the yuan.

The yuan deval effectively telegraphed Beijing's concerns about the economy, confirming fears that the situation was worse than the NBR is willing to admit and putting further pressure on commodity prices which are now sitting at their lowest levels of the 21st century.

Now, with EM in turmoil from Brazil to Malaysia, Bloomberg is out with the following map which sums up the carnage by showing just how many EM equity markets are in or closing in on bear market territory.

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To contact me with questions, comments or constructive criticism is always encouraged and appreciated:

gary@econintersect.com

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