Trader’s Narrative

For economic and market news and to see what interesting reading you may have missed last week, check out the list below. To see it all, go to news.tradersnarrative.com:

• Banks fight to kill proposed consumer protection agency
• The Disconnect Between Pay & Performance
• Solar Power’s Ability to Free Western World
• Get a FREE Subscription to Futures Magazine (limited time for US residents only)
• The IPO market heating up
• Gold Mania Hits China
• CNBC interview with Julian Robertson
• What’s Really Wrong With Wall Street Pay
• Get a FREE 50-page eBook: The Ultimate Technical Analysis Handbook (limited time offer)
• Two Major Technical Forces Are About to Collide in the S&P 500
• Volcker Urges Reinstatement of Glass Steagall

That’s just an ‘amuse-bouche’ - for the main course, follow the graphic link below to news.tradersnarrative.com:

And remember to check back regularly since there are interesting links added throughout the week. If you are a twitter user, add the news.tradersnarrative.com twitter stream to get new stories in real time.

The Week Ahead:

Every once in a while, deferring to a self-made promise to hold myself accountable, I dust off the archives and go over past calls, both beautiful and ugly. This is neither a masochistic endeavor in the case of failures, nor a narcissistic indulgence in the case of successes. The main purpose is to encourage myself and others to make such introspection a normal part of our schedule. And to learn from our previous decision making processes with an eye to improving and honing our skill set.

Here are the highlights of my past commentary on the Chinese stock market in chronological order:

May 9th, 2007: Want To See A Real Stock Market Bubble?

June 4th, 2007: Chinese Stamp Duty Increase: Death Knell For Mania

November 15th, 2007: Betting On A Bear Market In China

November 3rd, 2008: Time to Consider Chinese Stocks

April 14th, 2009: Coppock Curve Approves Of The Chinese Stock Market

July 28th, 2009: Chinese Market Sizzling Hot (Again), But Be Careful

August 5th, 2009: China’s Bubble 2.0 Threatens Global Recovery

Which brings us to the here and now. Since my last comment, the Shanghai stock exchange fell about 24% to its swing low, offering some juicy returns for those who were short or foregone losses for those that sold and stepped off the market stage for a breather.
Continue reading ‘Nailing The Chinese Market’s Gyrations’

Before the SEC could make their move, BATS and Nasdaq decided to ‘voluntarily’ stop flash orders. As alluded to before, this is a good development because it returns us to a state where all participants on the exchange have equal access to information, without any heavy handed regulatory action.

For more economic and market news and to see what interesting reading you may have missed last week, check out the list below. To see it all go to news.tradersnarrative.com:

• Say goodbye to flash orders
• The Great Missed Opportunity of 2009
• No, The Price Is Not Right
• CNBC Concerned About Australian Camels
• Get a FREE Subscription to Financial Magazines
• Chinese markets have become a giant Ponzi scheme
• Kass: Dousing the Fire With Kerosene
• Has the Gold Bull finally arrived?
• Lessons From Irwin T. Yamamoto
• Get the “Best of Trader’s Classroom” eBook for FREE (limited time)
• Turtle Trading using Excel Spreadsheets
• What’s the beef with high-frequency trading?
• Old Banks, New Lending Tricks

For the complete list, follow the graphic below:

And remember to check back regularly since there are interesting links added throughout the week.

Week Ahead: Fed Meeting & Retailer Earnings

Last week we reviewed the white hot Chinese stock market with a cautionary note. I wanted to return to it briefly because the situation is serious and deserving of much more attention.

Putting aside price charts of the Chinese equity market for now and turning to monetary measures, we can see something rather alarming happening. China’s M2 has enjoyed a constant rate of acceleration as shown in the chart below (in semi log scale). But in late 2008 the rate of acceleration suddenly increased dramatically:

This was a consequence of the massive stimulus plan put into motion by the Chinese government. They pumped unprecedented amounts of liquidity into their economy to offset the world-wide economic slowdown. There would be nothing singularly alarming about that since all central banks around the world, as well as governments in charge of fiscal policy, have orchestrated a collective burst of activity.

What is alarming is that the Chinese economy, stock market and especially real estate market are just now displaying bubble-like characteristics. The government controlled banking sector is a mystery wrapped in an enigma. No one can begin to fathom the amount of non-performing loans on the books. Unlike the US which went through a gut wrenching cleansing - thanks to the largess of the lobby-less taxpayer, the financial sector is once again back in fighting shape (privatized profits, public losses). China has yet to address their toxic assets

As we briefly touched on before, since last year’s low the Shanghai market has now appreciated more than 100%. Once again the stock market has enthralled the average person in China with thoughts of wealth and the possibility of making more in a month than what they earn in a year at their regular job. Speculation in the market is seen as not only a legitimate way to make money but a very lucrative one with low barriers to entry.

A sure sign of a bubble is extreme turnover. Recently, the total Chinese stock market turnover (in one day) reached $63 billion. That’s more than the combined total turnover of $58 billion in London, New York and Tokyo for the same day!
Continue reading ‘China’s Bubble 2.0 Threatens Global Recovery’

While the US market has been incredibly strong, the Chinese stock market, by comparison, makes it look downright flaccid.

A few months back we looked at the Shanghai Stock Exchange Composite and noticed that the Chinese equivalent of the Coppock Curve had turned positive. As well, just a few weeks before this long term signal was given, we had another important positive development: a golden cross. Since then prices have climbed in what can only be described as a trend followers dream.

That was a good place to go long Chinese equities (green up arrow). Since then the Shanghai Composite has climbed by 37%. But if you were reading this blog way back in early November 2008, I wrote about the extremely negative sentiment in China towards stocks and how this was a great contrarian indicator.

Back in November 2008, the Shanghai Composite was trading around 1700 - pretty much nailing the exact bottom (green up arrow). With the Shanghai Composite now trading at 3438, that’s 100%+ in 9 months.

So obviously, everyone all of a sudden loves Chinese stocks now. Their IPOs are popping like crazy. Just today China State Construction Engineering opened at 6.70 yuan, well above its initial public offering price of 4.18 yuan and closed on heavy volume at 7.30 yuan. It is telling about where the future global epicenter will be when the largest global IPO so far this year is Chinese.

A good old IPO frenzy is a sure sign of a sentiment extreme, just like billboards lampooning the stock market are a contrarian indicator at the bottom. But there are other signs of caution.

The last time the Shanghai Composite closed this far from its simple 50 moving day average was way back in October 2007… just as the market was making its top at slightly under 6100. And the last time the index closed this far above its 200 day simple moving average was in November 2007. Again, not a good time to be long this market.

Also, notice that simple support and resistance highlights this level as congestion going back to the spring of 2008. As prices were falling last year, they were met with strong support around this area. The Shanghai Composite thrashed about as prices disturbed their smooth downtrend. So this same area is now resistance as it acted as support before.

There is no question that things are really stretched at this point in Chinese equities. Of course, price can always continue but if you’re sitting on nice gains, it doesn’t make sense to continue to ride them as the odds are now totally skewed against you. The time to go long Chinese stocks was when no one wanted them, late last year as I pointed out back then.

From a long term perspective, having being blessed with both the “golden cross” and the Coppock Guide upturn, the best is yet to come. But not before we have a pull-back to shake out the weak hands. So unless you are ready to ride so major turbulence, it would be smart to lighten up here and ring the cash register.

If you’re not going to listen to me, consider Jeremy Grantham; who was correctly pessimistic and called the bear market as well as the spring rally this year. In his recent report, the chief investment strategist at Boston-based institutional money manager GMO writes:

Deciphering the strength of the Chinese economy will also play a major role in formulating our view of any future relative strength of emerging. My colleague, Edward Chancellor, strongly suspects that the Chinese economy is dangerously unbalanced and very likely to come unhinged in the next few quarters, surprising the pants off investors. On the other hand, the strong longer-term case that I outlined in “The Emerging Emerging Bubble” 15 months ago seems intact. I suggested then that emerging equities would sell within fi ve years or so at a distinct P/E premium to celebrate their obviously superior GDP growth compared with that of an aging developed world. Emerging market equities are already selling at a modest premium to EAFE and the higher quality half of the U.S. equity market.

Being pro-emerging yet anti-China is a dilemma for us; we are working to resolve it. Meanwhile, emerging equities, like most risky asset components, are moderately overpriced. We in asset allocation may, however, push our luck in emerging – particularly ex-China emerging – using inertia to reduce our current modest overweight. If we do this, it will be out of respect for the high probability that emerging equities will sustain and increase their overpriced level relative to the rest of the world.

You can download the complete report from Jeremy Grantham from the FREE Trading Resource Section (in the Reports folder). There is a lot of other stuff you might like as well, so take a look around.