The 7% plunge in the SSE Index does not auger well for global stock markets

The first day of trading in Year 2016 had seen Shanghai Stock Index dropping 7% and triggered the activation of circuit breakers to close the stock exchange for the day. This had, in turn, caused other major markets in Europe, US and Japan to tank as well. It may not auger well for the global stock markets in the near-term, and it is certainly not going to be smooth-riding going forward.

Of late, the Capricorn effect that used to be an indicator for the stock market trend has been losing its shine. With the advancement of the information technology, news and information are now able to reach their intended recipients around the world almost at the same time. In other words, stock markets have become more efficient. So, when the FED signaled a buying program for bonds or when FED announced a possible interest rate hike or any major events happening in any parts of the world, stock markets all over the world are almost able to react immediately. In other words, the Capricorn effect that happens in January has lost its usefulness to be forward indicator of the stock market direction.

But then, what about the 7% plunge in Shanghai Stock Exchange (SSE) that triggered the circuit breakers yesterday? The extremely significant drop and it happened on the 1st day of trading in the year clearly indicated that investors were not optimistic of Chinese economy going forward. Never mind if the massive sale orders were due to the anticipation that there would be a massive sale by major shareholders after the 6-month lock-up period following the mid- 2015 stock market rout. The point is that the economy is not going to be good going forward and that is why investors are heading for the exit door at this early point in the year. Today’s further sell-offs of about 2% further confirmed this inference. In fact, it had happened twice, at the opening bell and in the early afternoon although it managed to claw back most of it losses to end about 8.55 points down. The volatility goes to show that the investors’ sentiment is indeed very fragile. Certainly, being the world’s second largest economy, a plunge in its stock market is going to be impactful on the other stock markets as well.

Adding to the dismay, with FED’s interest rate hike likely to continue into 2016, the escalating tension in the Middle East between Saudi Arabia and Iran, we are heading for a tough time going forward.

So, conserve cash. Be vigilant!

Brennen has been investing in the stock market for 26 years. He trains occasionally and is a managing partner for BP Wealth Learning Centre. He is also the author of the book – “Building Wealth Together Through Stocks” which is available in both soft and hardcopy.

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