China Is To be Traded, Not Invested In…
Some narratives are contagious because they seem to offer a confirming fact. We can say with some accuracy that most people put on a show of their own knowledgeability and try to conceal their ignorance of millions of facts. Hence, narratives that seem contrary to prevailing thought may have lower contagion rates and not result in epidemics. ~ Robert Shiller, “Narrative Economics”
In this week’s Dirty Dozen [CHART PACK] we look at Chinese equities and why they’re to be traded, not invested in. We then look at Chinese equity alt plays, such as long DAX. Finally, end with a high Trend Fragility score along with a long stock pitch, plus more…
1. BofA’s Flow Show Summary with highlights from yours truly. A few things… the KMX and FUL positive reversals following negative earning surprises can be classified as news failures, which is an important signal in and of itself (read about our “No Sense Algorithm”). Also, 43% of SPX market cap under FTC/DOJ investigation… That’s something… It doesn’t matter now but I guarantee you it will matter a lot when this cycle eventually turns.
2. Back in April of this year, we pointed out the probable bottom in Chinese equities, writing “We don’t invest in Chinese assets because we don’t care to allocate capital to the CCP. But for you degens out there, Chinese large caps (FXI) look to have put in a double bottom.” Link here.
It was a classic Play The Player setup: consensus bearish sentiment/positioning, bullish-inflecting technicals, all just waiting for a fundamental catalyst, which they finally got last week when the PBOC announced surprising easing measures (charts via GS).
3. The measures put forth last week will primarily impact financial assets and many commentators are correctly saying that fiscal is needed to put a floor under China’s economy.
The rumor mill is active right now, and there are whispers of an inbound fiscal bazooka. Who knows… the CCP is a black box. But knowing that Xi lives under the sword of Damocles, he likely pulls the trigger if indicators of social stability continue to trend south (charts via MS).
5. Xi really doesn’t like giving money to the plebes though because he thinks it’ll make them lazy. But if he wants to create a sustainable economic recovery, then household transfers will have to be a part of that mix, instead of their current MO of creating perpetual industrial bloat (charts via MS).
6. Here’s MS using Japan as the case study for what China needs to exit its deflationary slump:
“It was not until in late 2012 — when markets began pricing in Shinzo Abe’s election to the premiership and the Abenomics policy agenda that sought to lift Japan out of deflation — that risk assets rallied in a more sustained manner… the key takeaway is that the sustainability and scale of the rebound in asset markets will have to hinge on a successful breakout from deflation and corporate earnings growth bottoming out and recovering.”
7. Consider this a PSA: Chinese equities are to be traded, not invested in. Why? In 2018, I wrote that emerging markets were a dead money trade (link here). That thesis has played out to a T. But if you want the shortened version of why Chinese stocks are only for dating and nothing more serious, have a look at the two graphs below from Aoris.
Long-term equity market performance is a simple matter of supply and demand. And when it comes to China, well, they loooove feeding the ducks. I wrote about this equation in-depth in “Markets as a Banana: The MOST Important Fundamental.”
I suggest giving it a read if you’re not familiar.
8. Okay, so we don’t swim in China’s pool. That’s okay because there’s a number of ways (better ways, in our opinion) to benefit from Xi pumping the stimulus. One very simple way is to buy the DAX. Here’s a weekly chart. It just broke out from a multi-month rectangle. It’s now trading at all-time highs.
9. Interesting take on the “max pain trade” from GS:
10. Just a heads up, our Trend Fragility indicator (a composite of short-term sentiment and positioning data points) has shot up to the 97th %tile. What does this mean?
Well, more long-term measures of sentiment/positioning remain very supportive of the bull trend (BofA’s Bull&Bear is still neutral). This being a shorter-term measure, we should be on the lookout for a local peak over the next 1-3 weeks.
The narrative is quickly shifting into the “buy everything that’s not buttoned down” stage. And that typically leads to a good shakeout of all these weak hands chasing here. Not to worry though, that’ll just give us another technical entry to add to our longs.
11. For those like us who enjoy dumpster diving, we’re looking at lithium here. The Global Lithium Miners ETF (LIT) is going to put in a strong positive close for the month. Fund Flows are very depressed and short interest is elevated. The technical picture is still awful, but worth keeping an eye on how things develop here.
We’re buying.
12. Meta’s stock broke out from a compression zone recently. Chart below is a weekly. META is not only a leader in the AI space but they’re also doing some really interesting things on the hardware front. Give this review of their new AR “Orion” glasses from Bloomberg’s Tech guy, Ed Ludlow, a watch (link here).
Ed spent two hours with the new tech and says “it’s the most profound experience he has with a technology so far.”
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Thanks for reading.
