1/24 Daily Market Note: 1000 Point Bounce from Hang Seng. Did we just reach the bottom?
China stages massive short squeeze. U.S. Continues Rally.
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Hi Everyone - good morning! Today’s strategy note is sent out earlier as a couple items are worth discussing earlier in the session.
First off, I want to thank readers and members for trusting our process when it comes to China. This sector is arguably the hardest sector to participate in, but together, I view investing in this area as an intellectual challenge to overcome. I continue to sincerely believe that even though China has brought investors more challenges than joy, it is the ultimate training ground for investors to prepare for more choppy seas ahead for the S&P 500 and Nasdaq-100 when the landscape shifts.
Onto macro.
China is finally taking more concrete steps to revitalize its economy, first with a planned stimulus package of $278 Billion to support shares onshore through its Hong Kong exchanges earlier this week. And yesterday evening, China’s PBOC cut its reserve requirement ratio (RRR) by 50 basis points, the largest reduction in 2 years. China’s RRR represents the amount of cash that banks must hold as reserves. This will be long-term helpful for the property market.
We can see that the latest policy moves have sparked an inflection point in the Chinese Yuan, which often serves as a barometer of economic sentiment. Generally, a stronger currency via the Yuan is correlated with increasing confidence. The Yuan strengthened from 7.22 USD/Yuan to 7.14 USD/Yuan over the past week, meaning that it has appreciated by a full 100 basis points against the Dollar.
Currency Interpretation: If the chart is falling, that means the currency is strengthening. And vice versa. For example, today, the 1 USD can only convert to 7.14 Yuan. Last week, it converted to as much as 7.22 Yuan per dollar.
I view currency stabilization as a major sign that stability may be returning. Peaks and troughs in the Yuan can at times serve as a prelude to what policy makers may be thinking. A directional drift back towards 7.09-7.11 USD Yuan would be quite positive for Hang Seng/China ADRs.
While it is too early to say whether China stocks are ready for a big massive structural rebound, what I do believe is that the downside now has an implied policy put underneath the latest lows. What this suggests to me is that selling puts across the board on companies that are still performing well in China beneath recent lows may fare well as a theme in 2024. I believe downside is truncated after this year’s gruesome selloff together with the policy puts that are currently being drafted up.
I can’t comment on Calls and Direct Shares after a ~1000 point violent rally off the lows from Hang Seng. Defensive positioning via selling puts at far out strikes produces potentially better risk-adjusted outcomes given that China is a highly mean-reverting market. We had a small section on aggressive ideas for China, but as a public-facing strategist, I have to prioritize capital preservation as a theme.
One of the companies that we continued to like and reiterated yesterday evening was New Oriental (EDU). The company reported earnings today and they resumed growth in their educational centers. The Puts we sold on them yesterday have dropped 50% at the open today as the stock popped 10% early in the session. The company’s fair value is at/north of 80/share based on my personal modeling. It touched this level in the morning. I believe it reclaims this level again this year.
In U.S. markets, the melt-up continues on higher timeframes, and I don’t see bearish catalysts being powerful enough to force an equilibrium change until a FAAMG company massively disappoints or the Fed provides a big surprise message.
Netflix earnings gave investors a reason to be more optimistic as their subscriber growth soared past expectations. This metric is singlehandedly the most important KPI (key performance indicator) for the firm.
This morning, I’ve sold Puts expiring this Friday at strikes 515-520 with 50% profit targets. Given that the company’s sub growth is back on track, it may be hard for bears to push the stock back far below today’s opening print (537/share) by Friday.
Selling IV strategies on expensive stocks are ideas I can share if there’s interest, but given the capital intensity of these transactions, I want to share safer strategies with my Community.
Such as Selling longer expiry Puts on BABA and EDU last night, where today BABA puts have fallen 20% and EDU puts by 25-50% (depending on time benchmark).
Have a great day everyone. Please share and subscribe.
-Larry
Disclaimer: My investment community is not investment, financial, or trading advice, but for educational informational purposes only. I am happy to share my personal opinions which I provide as my personal journal. Trading of any kind of securities involves a lot of risk. No guarantee of any profit whatsoever is made. Investors may lose everything they have. Practice extreme caution. No profit is guaranteed whatsoever, You assume the entire cost and risk of any trading or investing activities you choose to undertake. You are solely responsible for making your own investment decisions. Owners/authors of this publication are NOT registered as securities broker-dealers or investment advisors either with the U.S. SEC, CFTC or with any other securities/regulatory authority. Make sure to consult with a registered investment advisor, broker-dealer, and/or financial advisor.