Does weakness in Chinese stocks spell trouble for the U.S. ones?

SP:SPX   S&P 500 Index
A while ago, we drew attention to the intriguing correlation between the Chinese and U.S. stock markets. In fact, we presumed that if the Chinese economy and stock market were doing well (following the reopening after Covid-19), it would be inherently positive for the U.S. stock market and could postpone a recession to later. From around October 2022, both indices were rising in tandem. However, in March 2023, the positive correlation between the two started to weaken, and the U.S. stock market kept rising while Chinese stocks began to move increasingly sideways, finding resistance above 20,000 HKD. We find this development interesting as specific U.S. stock titles are reaching highly overbought levels, and the general theme in the media continues to be that of “soft landing” and that we have nothing to worry about. Seemingly everyone seems to forget that regional banks started to implode in 1Q23, and without the FED stepping in and providing more liquidity to the market, the situation would have been much worse. Then, on top of that, the FED keeps hiking into a slowing economy with many subtle signs of a recession already presenting themselves. We believe that if the Chinese stock market continues to roll over, then it can potentially lead to the spillover effect.

Illustration 1.01
Illustration 1.01 shows the correlation between the SPX and HSI (Hang Seng Index). It can be easily observed that both indices trended down from October 2021 until October 2022. After that, both indices trended together to the upside until late March 2023, when SPX kept increasing, but HSI began finding resistance above 20,000 HKD.

Illustration 1.02
Illustration 1.02 displays the daily chart of HSI and the resistance area.

Technical analysis gauge
Daily time frame = Neutral
Weekly time frame = Bullish
*The gauge does not necessarily indicate where the market will head. Instead, it reflects the constellation of RSI, MACD, Stochastic, DM+-, ADX, and moving averages.

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DISCLAIMER: This analysis is not intended to encourage any buying or selling of any particular securities. Furthermore, it should not be a basis for taking any trade action by an individual investor. Therefore, your own due diligence is highly advised before entering a trade.
VIX is up more than 16% today.
VIX made a new high after continuously (and very subtly) marking higher lows since 22nd June 2023. Unless it loses momentum and drops soon, there is a high chance of panic spreading in the market, dragging valuations much lower.
Illustration 1.03
The picture above shows the daily chart of ES1! and HSI1!. The positive correlation is rising again.

Illustration 1.04
Illustration 1.04 displays the daily chart of HSI1!. If the sloping support fails to hold the selling pressure, then we can likely expect much more downside for HSI1! (and inherently also in the U.S. market).
Illustration 1.05
HSI broke below the sloping support amid news about one of the biggest wealth managers in China being behind on payments.


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