I think the market has a Goat problem.
According to the Chinese calendar this is the Year of the Goat. Goats are nice people, but they are unlucky with money. Paraphrasing comments from an Asian website:
Good fortune can be elusive for those born in a year of the Goat; they will often face financial difficulties. Therefore, they should adopt conservative strategies when dealing with investments. Those with a speculative nature should restrain themselves from gambling in order to avoid large losses.
From August 2014 to May of 2015 China went bonkers over A-Shares, but the Goats now have reverted to type and the sharp selloff in the Shanghai index has everyone thinking about a potential correction in US stocks.
I’m no different. About 10 days ago I published a monthly chart of the S&P 500 with a projected year-end target of 1576. August was indeed a volatile month, but September has been relatively benign, so at the moment that target looks excessively bearish.
The chart with this article shows that both the S&P 500 and the Shanghai Composite index are in sync at the moment; both are enjoying a low volatility month. Additionally, the Shanghai index is paused at the 61.8% retracement of the move up from 2013. This is a common support level for stock traders, so it is a good place for the index to catch its breath.
That particular retracement level, however, is usually sold by professional index futures traders, who generally ‘fade’ conventional technical analysis patterns every chance they get. The 2500 area in the Shanghai index is the 78.6% retracement target, which I believe is very likely to be attained. That would be bad for US stocks.
But given the bubble-popping conditions in that country, 78.6% is unlikely to lend much support. Stair stepping down, the 88% retracement is around 2,250, which is a reasonable short-term target.
But there may be even more thorny misfortune in store for the Goats. I expect the 2013 low to be taken out and the Shanghai index to test 1500 before the dust finally settles around the Goat pen. If that transpires, it’s possible that both the S&P 500 and the Shanghai indices will have the same nominal value on some odd day in December of this year: 1576.
If it comes to pass that we are indeed subject to such a cruel joke on the part of the market gods, don’t despair. Next year is the Year of the Monkey, a much more favorable and fortunate animal spirit. Keep your powder dry for that particularly auspicious New Year celebration.
