Pre-Market Plan [10/8]: First Meaningful Pullback in China ADRs + Hang Seng
Good Morning -
This week’s U.S. macro calendar is primarily focused on CPI Headline inflation. A secondary focus point is the Producer Priced Index (PPI) data come out one day after CPI.
Expectations are for headline inflation to come in at 2.3%.
My initial thinking is that any print that comes out between 2.3%-2.4% may have a favorable market reaction. Anything too cool/soft close to 2% is not ideal in our opinion given that it can open up deflationary narratives.
The real news though for my members in Europe, Asia, and Australia (which is a sizable portion of my private community) is that we finally had our first meaningful pullback in the Hang Seng (HSI).
Let’s take a look at what we talked about in yesterday’s 10/7 Members Note.
I study the option chain routinely to understand forward expectations, and I last week I had found that PDD saw unusual activity on the option chain in Puts and Calls with 45-60 days till expiry.
What was the interesting observation? Well, I noticed that BOTH longer term Puts and Calls were rising last week for PDD even though the stock was primarily moving higher.
The takeaway was that smart money was quietly positioning for a larger upside extension or a big mean-reverting move.
And last night, we got the big mean-reverting move with HSI down -2000 points.
Is the China rally over? I think not. This type of selloff is completely expected after HSI had risen over 6000 points in a month’s time.
To be more specific, we think that China’s long-term upside is now rather clear. The market IS going to move higher on longer-term timeframes. A few Red days is not going to change the fact the improving fundamentals will point towards Higher prices in the future.
However, in the short-term, we discussed that the next proper selloff in China ADRs will be a “big one” and that its magnitude could be -4-6% - in one day.
Earlier this week, HKEX (0388) reached our 400HKD target zone and then immediately retraced lower. PDD and EDU both reached our Bull Case DCF Value area (DCF tables shared within Daily Plans) of 155-160 and 85-90 respectively on Monday, and that also appears to be the same region big investors took profit.
Will discuss more nuanced strategy and any potential new opportunity sets in our Members note.
What I believe folks also find super valuable are the rotational ideas we share in U.S. markets. There are stocks that continue to move Up even though the index has been range-bound for quite a while. They definitely are helpful when markets are flat/down.
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If you are a public reader and would like to give us a little support to help us continue to provide high-quality analysis for all, please visit IBKR (good execution, good research, advanced capabilities).
Disclaimer on H-Shares:
A note of caution for H-Shares (or China ADRs). They are extremely, extremely volatile during macro policy changes, and as a sector, exhibit the highest forms of volatility compared to other sectors I’ve studied. Holding H-Shares or China ADRs is only one notch below holding Crypto/AltCoins in terms of volatility. Only folks with the highest risk tolerance and highest ability to manage volatility should look at H-Shares. H-Shares can swing 20-30% in the span of days on the upside or downside. It can make Nasdaq-100 stocks (my core coverage) look slow.
As an example, Meituan which was a left for dead stock was trading at $60HKD just a few months ago. Shares have nearly tripled to around $180HKD, with the bulk of the advance coming from the past few weeks.
My DCF Model approach, which members know have powerful degree of forecasting power in my core coverage because of my familiarity with the companies, is NOT going to work as well on H-Shares. Any commentary that I give on H-Shares relies much more on macro observation and technical analysis, which may or may not be a full picture of a company’s fair value. For this reason, there is a speculative type of element when it comes to H-Shares. Investing in H-Shares is completely different from investing in U.S. stocks.