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Our E-Wave cycle forecast model has been steadfastly calling for a stock market correction, and perhaps a sharp one.
In fact, stocks are overdue for a pullback.
And now I’m seeing fundamental confirmation that a correction is dead ahead, and it’s from an unlikely indicator: China’s deleveraging.
Recently, I wrote about China’s runaway debt binge. And I told you how Beijing has reined in credit growth while it cracks down on China’s “shadow banking” system. Well it’s working, which is good for the long-run health of China’s economy, but bad for global stocks, as I’ll explain in just a minute.
First the facts. Shadow-banking assets in China surged 21% last year alone to the equivalent of $9.3 trillion, equal to 87% of China’s entire economy!
There’s no question such fast-paced growth in credit – much of it loosely regulated at best – represents a clear and present danger to China’s economy.
So about nine months ago, the authorities in Beijing correctly began cracking down on excess credit growth, by gradually raising short-term lending rates. And it’s paying off.
In April, total credit growth slowed to 14.4% year-over-year, down from 16.6% a year ago.
Although the Red Dragon’s economy has slowed a bit as a result, its growth still stirs envy in the rest of the world, clocking in at 6.9% last quarter, with retail sales “slowing” to 10.7% year-over-year and corporate-profit growth of “just” 24% in March!
But here’s why China’s credit slowdown spells trouble for global stocks …
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As you can see in the chart above, credit growth in China has a very tight correlation with the health of global stocks. When China’s credit growth turns negative, stocks tend to struggle.
In the past, we’ve seen steep market corrections lining up perfectly with periods of negative credit growth in China … most notably in the 2008 bear market, again in 2011, and again in 2015. Well guess what?
China’s credit growth just turned negative again for the first time since early 2014. And the last time this happened, the Dow dropped 8.5% in mid-2014, then suffered back-to-back corrections of 16% and 14% in 2015 and early 2016!
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So far, stocks have been defying gravity – as well as my own expectations for a correction – by notching new record highs recently, led mainly by the tech-heavy Nasdaq 100 Index.
The S&P 500 got in on the action this week by hitting a new record high above 2,400 for the first time. Even the small-cap Russell 2000 scaled a new peak.
But mark my words, this rally is running on fumes and a sharp correction could begin at any time. China’s credit growth turning negative could be just the catalyst to trigger this sell-off at long last.
I’m aiming to take advantage of this correction for Real Wealth Report subscribers with timely trade recommendations designed to profit when the stock market rolls over. For more details, click here.
Good investing,
Mike Burnick
Mike Burnick, with 30 years of professional investment experience, is the Executive Director for The Edelson Institute, where he is the editor of Real Wealth Report, Gold Mining Millionaire, and E-Wave Trader. Mike has been a Registered Investment Adviser and portfolio manager responsible for the day-to-day operations of a mutual fund. He also served as Director of Research for Weiss Capital Management, where he assisted with trading and asset-allocation responsibilities for a $5 million ETF portfolio.
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With China on the verge and Dump trying his best to get Impeached, the Global Marekts are at a cliff….. The GOP is about to repeat 1929 and 2008 all over again…. Greater question is who will be the next FDR, or the next Obama to save America after the Con Man is gone?
We will have the Dumocrats pointing the finger on the very legislation they themselves created, signed off on and Rallied behind. Or perhaps you dont remember Bill Clinton signing the bill to allow banks to use account holders monies,backed by the good faith if the US(taxpayer) Government for investment purposes. All spurred from guarantees of Sallie Mar and Freddie Mac. All backed and proliferation of the American Labor party the Democrats.
Perhaps Eagle495 you have your dates wrong look at Sept 1 1939. The historical day Hitler and his gathering of labor parties Sold out the German people and invaded Poland. We all know where he arises from Fears, lies and the talk of organized blame. But thanks for the post it shows how little you know except from TV
Eagle,
Your comments really show how much you don’t know. Always bashing conservatives buying into the rhetoric.
Mike –
Looks like the correction in the US share market has begun today.
Steve
On one hand you are talking about great bull run till summer 2018 and Dow to reach 31000..and on other hand you talk about sharp correction which could be around 8%.what to do?what abput Gold? View on gold for next 5 years
That graph/chart included in the article respecting China’s Runaway Debt issue ….. don’t know what its supposed to demonstarate but certainly doesn’t appear to demonstrat any obvious correlation between the two metrics/events being measured.