Stocks took another major tumble on Monday, following last week's surge in volatility, as persistent economic concerns pummeled investor sentiment.
The sell-off was driven by a combination of persistently escalating trade and currency tensions between the U.S. and China, intensified anti-government protests in Hong Kong that led to cancellations of all departures from the city's international airport, and bond yields that continue to plunge. Relentlessly falling yields remain a serious problem for investors, as they underscore expectations of an economic downturn and potential recession brought on by slowing global economic growth and trade conflicts.
The chart of the S&P 500 (SPX) shows the clear breakdown in technical structure both last week and on Monday. Last Monday's drop of nearly 3% was the worst one-day decline so far this year. It prompted the index to gap down and slice below both the key 50-day moving average and a major uptrend line extending back to the December lows. Though subsequent days last week saw a sharp relief rebound, price remained below the 50-day average.
And Monday's drop again pressured the index below the major trendline. Market volatility and investor skittishness appear here to stay, at least for the time being. Any further drop could target the next major downside support area around 2,800, where the 200-day moving average is currently situated.
Bond Yields Approach New Lows
The stair-step move down for the 10-year U.S. Treasury yield has become a source of deep concern for investors, as it highlights severe worries about the economy.
As shown on the chart, after the 10-year yield hit a new low last week that hasn't been seen since October 2016, there were a few days of brief respite as yields rebounded. On Monday, though, the slide in the yield resumed with a vengeance, raising more red flags for the economy and the markets. Where may yields go from here? Although it's impossible to predict, the next major support level to the downside is around the 1.36%-area lows of 2016.
China Large-Cap ETF Falls to Key Support
News on Monday was especially bad for China, as its key administrative region, Hong Kong, has been undergoing intensifying anti-government protests in recent weeks and months. As mentioned, Hong Kong's international airport halted departures on Monday in response to the burgeoning protests. The world and markets are now watching to see how the Chinese government responds. A violent or otherwise overly aggressive response could have a sizable impact on global markets. This situation clearly exacerbates the ongoing U.S.-China trade war, weighing heavily on Chinese (and U.S.) markets.
As shown on the chart of the iShares China Large-Cap ETF (FXI), major Chinese stocks have been dropping precipitously of late, and the fund has now reached down to approach key support around the $38.00 level. With any significant breakdown below this support, the next major support area is around $35.00.
The Bottom Line
Market concerns over U.S.-China trade conflicts and Hong Kong turmoil appear to be building, and bond yields are showing a dim view of economic prospects going forward. The buy-the-dips crowd appears to have evaporated at the moment, and the technical structure of the S&P 500 appears shaky, at best. Caution continues to be a good bet at this juncture, at least until volatility settles once again.
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