How to Beat This Market’s “Three Cs” of Risk

Tom Gentile

The last few weeks of trading have been downright rough…

The markets staged a "whistling past the graveyard" rally for a little more than a week after the Aug. 24 crash only to come tumbling down again by 3% on Sept. 1 as nearly every sector was hit.

Robust technical support levels that were years in the making have been snapped like so many little twigs.

Key indicators have all but failed traders who are scrambling to find bottoms to trade off of, and the Chicago Board of Options Exchange Volatility Index (VIX) has been breaking six-year records, topping 53 on Aug. 24 and 30 on Sept. 1.

The sheer breadth of the chaos is matched only by the growing chorus of pundits speculating on the drivers of the chaos.

Let them speculate and fumble around in the dark. What's really rocking this market is what I call the "Three Cs."

Here they are – plus the two sectors that will rise above it all…

The First 'C' Is… China

This is really where it all starts…

We know by now that poorly prepared Chinese retail investors leveraged themselves up to their collective eyeballs and laid their life savings on the line for a shot at becoming the next millionaire on the markets in Shanghai and Shenzhen.

Chinese regulators sure made it easy, with extremely slack margin requirements and an officially sanctioned ethos of greed. That drove the markets skyward in a classic case of "irrational exuberance."

In mid-June, the bubble burst and the Chinese markets have been bleeding ever since, despite ever more extreme measures by the Chinese government to prop them up.

Margin calls and losses are leaving those investors penniless.

At the same time, the Chinese economy appears to be slowing down – although it's still growing at almost double the rate of the United States or European Union.

Many investors' first clue of that was the People's Bank of China's move to devalue the yuan. It was a logical move to make, but many investors read it as a frantic move to boost exports and shore up the economy.

That "spooked" people and sent them selling – all too easy to do if you don't have the full story.

The Second 'C' Is… Commodities

So China is still posting enviable growth rates by Western standards, but there is a noticeable slowdown, and that's exacerbating a global decrease in demand for commodities – and I don't mean index or bond futures.

Some of these physical commodities don't really correlate with the economy, but most of the really important ones do – especially oil and copper.

Not only are those critical to actually building and moving things, they're a near-perfect gauge of the economy; oil drives the production side, and copper the consumption side.

Crude oil tends to lead the charge up and down, with copper following the way as a confirmation for expansion and contraction of the worldwide economy.

Since China has the fastest-growing economy in the world, I like to use these barometers and tie them to the markets.

Tom Gentile

About the Author

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Tom Gentile is one of the world's foremost authorities on stock, futures and options trading.

With more than 25 years' experience trading stocks, futures, and options, Tom's style of trading systems and strategies are designed to help individual investors propel themselves past 99 percent of the trading crowd.

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