2/6 Daily Market Note: Can President Xi turn around the China markets?
Hang Seng bounces 4% after China steps in.
Hi Folks,
We finally saw some serious vigor in China markets after President Xi Jinping is briefed with financial regulators on the market’s recent rout, which has greatly shaken investor confidence and created a tsunami of foreign investor outflows up until this point (billions just poured back over the past 24 hours due to this news).
We made a very lucky (I’m just going to say it was 100% luck) opinion that recent policy moves to shore up large caps may initiate a speculative advance in China ADRs ahead of BABA (and perhaps after) earnings. The BABA call options that we entered rose about 100% from entry, and our risk management process means that we take gains that are reasonable (100% seems more than reasonable to me), and leave runners to do the rest if the stock wants to keep running. As regular readers know, I must take a very defensive approach to trading China because of its mean-reverting nature.
If I had to give a lean, BABA earnings should be decent, but the last two days may have priced in some of the post-earnings advance that I was looking for. Stock went from 73 to 78 in 2 days. That was the move/range I was looking for after-earnings, around the 78-82 level.
Can President Xi turn around China’s market? My thinking is that if he really wanted to, he could flip investor and consumer sentiment to max bullish in about 6 months. However, that hasn’t been the policy playbook so far, so I expect action to be targeted for a period of time rather than to create a new bull market.
I detailed the BABA trade here on Instagram which you can read here. Make sure to follow if you haven’t yet already as I will try to post more often on IG going forward when time permits.
As for U.S. markets, it appears that intraday structures are beginning to resemble the observations that I listed in last week’s note, especially these bullet points here.
Yesterday, we can see the following daily structure for technology. Notice that once we made a low, we recovered and did not look back.
And compare that with today’s structure, where every bounce was tested lower, even though the day ended with a slightly upbeat tune.
The changing market structure is from my observation is a whisper that concentration risk in FAAMG/Semiconductors is becoming a real theme and that institutional buying is becoming a bit more exhausted at these levels.
While we cannot say the rally in technology is over, daily auctions such as this begin to piece together a picture that at the very least, intraday conditions are becoming more complex as 2-way action returns.
Outlook is discussed below.