A reduction of reserve requirements for Chinese banks is receiving the credit here on Friday morning for a strong bounce. The move creates liquidity of more than $100 billion but, more importantly, signals the willingness of economic officials in China to engage in monetary policy to bolster the country's struggling economy.
The weakness in the Chinese economy was on full display on Thursday as Apple Inc. (AAPL) cut its revenue guidance by about 10% due almost completely to slow iPhone sales in China. Much of Apple's other business is operating well, but the extent of the weakness in China caught the market by surprise. (Apple is a holding of Jim Cramer's Action Alerts PLUS charitable trust.)
Apple's issues with China caused concern that other companies would be cutting guidance as well. Officials from the Trump administration confirmed that this was likely and that is why the selling accelerated, although many stocks already have been anticipating news of this sort.
Fundamentally, the primary issue facing the market right now is whether it has been fully discounting the slowdown that companies such as Apple AAPL are experiencing. Although there has been much concern about economies slowing around the world, there haven't been many specifics for U.S. companies. There has been vague concern that a slowdown is coming, but it has not been quantified to any great degree. That is what has caused the selling to keep accelerating.
The news from Apple about slowing sales is important because it is a hard number and that makes it easier for the market to price in the problems. There is still concern about the impact of trade issues and slow international economies on other companies, but there is now more awareness.
This vagueness about the economic weakness is one of the main reasons the Fed has frustrated the market with a hawkish posture. The market does not believe that the economy can support rate hikes and the Fed Fund futures numbers are now indicating a 25% chance that a rate cut may take place. That belief is at great odds with the message that the Fed has sent, but eventually those views will be reconciled.
The more important question for the market right now is whether the indices will find technical support. We have experienced a classic bear market bounce and pullback over the past week or so, and now the issue is whether the indices will find support before they breach the lows hit on Dec. 24. That is the key level. The longer that holds, then the more optimism there will be that a bottom is forming.
The first step in any bottom is a low that holds and then a series of higher lows. We have the potential for that scenario, but the reaction to earnings season is going to determine if we fall deeper into a bear market.
We have a good bounce here on Friday morning, but it is likely that market players will hesitate to embrace it. Stock picking remains extremely challenging as the action is index- and macro-driven without regard to the merits of individual stocks.