Maybe many perma-bulls where surprised as the first trading day of 2016 kicked off with a market route to the downside.
After the Chinese stock market stopped trading with a 7% loss, the U.S. stock market picked up where China left off. The DJIA lost 276 points to close at 17,149 while the S&P 500 lost 31 points to finish at 2013. The Nasdaq was lower by 104 points to close at 4,903 and the Russell 2000 fell by 27 points to close at 1,109.
So what happened on this first trading day of 2016 to cause such a market selloff? Well, one reason for the selloff on Monday was the fact that the Atlanta Fed lowered its 4th Quarter GDP forecast to 0.7%. In late November, the Atlanta Fed put the same forecast at 2.2% growth. In other words, the Fed just raised interest rate and at the same time has admitted that growth is slowing. That should have everyone scratching their heads. As a matter of fact, Atlanta Fed President Dennis Lockhart said a few weeks ago that U.S. growth was "solid".
In addition, Cleveland Fed President Loretta Mester says "China isn't a big risk to the U.S. economy." Apparently, she, nor the Fed, understands the dynamic, complex, interconnectedness of the global system. The Fed continues to believe in an equilibrium model that no longer works.
What appears to be happening currently is that Janet Yellen and the Fed is getting a course in what IMF Lagarde calls "spillover."
Thus, a Fed rate hike equals a strong dollar and the strong dollar equals China capital flight, which equals China meltdown.
The markets may get a bounce to the upside on Tuesday. However, the path of least resistance is lower. Attached is a weekly chart of the SPY which clearly shows a downward trend in that index. Buyers need to understand that the markets are headed lower in 2016.
This article is commentary by an independent contributor. At the time of publication, the author held no positions in the stocks mentioned.