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Will Evergrande’s Collapse Crush Your Portfolio?

by | Sep 20, 2021

We had quadruple witching options expiry driving the overall market narrative this past week…

This week, it’s Chinese real estate company China Evergrande Group (OTC: EGRNF) sending things into a tailspin. For some reason, markets seem to react to big, scary mainstream media headlines. And as I checked financial news Monday morning, one of the hot topics seemed to be the impact of an Evergrande collapse.

Now don’t get me wrong, a large company with a bunch of debt — all of which will have to be backstopped by the Chinese government — is an issue.

It’s not all clear how widespread the effects of Evergrande’s collapse will be…

But this thing has been going down for months!

The collapse actually started in February…

Then kept going in March… and April… and May… and June. 

And in July and August? It really tanked.

Source: Bloomberg

In other words, there’s nothing new to see here.

So if you weren’t worried about Evergrande “infecting” your portfolio during each and every one of those months, you shouldn’t be worried about it here, either.

Things More Important Than the Impact of Evergrande’s Collapse

That being said, the VIX, or “fear gauge,” has popped up above this past month’s levels, making a higher high.

Source: Bloomberg

The volatility of volatility is also turning up… 

Source: Bloomberg

And total market volume was up on Friday as well…

Source: Bloomberg, Fortune Research

So my attention is directed entirely to those three factors.

If this were a real market sell-off, however, we would see everything selling while bonds and gold ripped to the upside.

We’re just not seeing any real volatility in those asset classes compared to, say, March 2020.

Source: Bloomberg

So if currencies, bonds, high-yield spreads and commodities all break down, then we can talk about a big market correction.

Right now at least, signs are still pointing to buy the dip.

Source: Bloomberg

In particular, large-cap tech is where this sell-off appears to be localized.

Ask yourself this: How much Evergrande exposure do you think Google owns?

I’ll give you a hint: basically none.

And notice the Utilities and Real Estate sectors are both green… If you want to hide out, those are solid places to do so.

Real Estate in particular could shape up to be exceptionally good this week. There are four separate housing-related data points — Building Permits, Housing Starts, Existing and New Home Sales — poised to beat expectations.

Source: Bloomberg

But if the only thing that has changed in terms of U.S. economic conditions is whatever impact an Evergrande collapse has… 

Then nothing has really changed at all.

That would mean Monday’s sell-off is nothing more than just weak hands shaking themselves out of the market, and this is just another U.S. dip to be bought.

Our favorite way to play this pullback remains the Proshares UltraPro QQQ ETF (NYSEArca: TQQQ), but we will look at adding some defensive names on Tuesday’s watchlist, too.

Believe it or not, there are a lot of good options out there.

All the best,

Matt Warder

Fortune Research

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WRITTEN BY<br>Matt Warder

Matt Warder

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