FOMO Drives Biggest Gain In Shanghai Since 2008, Chinese Market Breaks The Negative Pattern

To gain an edge, this is what you need to know today.

Chinese Market Breaks Negative Pattern

Please click here for an enlarged chart of Xtrackers Hvst CSI 300 China A Shs ETF Class A ASHR.

Note the following:

• In a prior article, we shared with you details of China's stimulus program. Prior to last Tuesday, Chinese stocks had been beaten down and had been trading at low valuations.
• The chart shows that the Chinese stock market has broken the negative pattern of lower highs.
• The chart shows that the pattern existed from the 2021 peak until last week.
• When the rally first started, the concern was that this rally would also fail like prior rallies. Initially, it was simply prudent to consider the rally in Chinese stocks last week to be suspect.  The chart shows that even the COVID opening rally failed, and the subsequent AI rally also failed.
• The chart shows that the rally is on high volume. This indicates conviction and provides confirmation for the rally.
• RSI on the chart shows that the Chinese stock market is very overbought. Overbought markets tend to pullback in the short term.
• In Shanghai, the CSI 300 jumped 8.5%. This is the biggest single day gain since 2008.
• The five day gain in Shanghai is the strongest since 1996.
• The chart shows that this rally has decisively broken the downtrend like a rocketship.
• From a technical perspective, such strong rallies tend to take stocks higher after a brief pullback.
• The rally is partly driven by fear of missing out (FOMO) among foreign investors who are rushing into China.
• Money is flowing out of safer Chinese 30 year Treasury bonds and into Chinese stocks. Chinese 30 Treasury bond futures fell to a two month low after losing 3.6% last week.  This is the worst quick loss ever.
• For the day, the economic data from China is poor. China's PMIs are weak. Here are the details:
  • Manufacturing PMI came at 49.8 vs. 49.4 consensus.
  • Non-manufacturing PMI came at 50.0 vs. 50.4 consensus.
  • A number less than 50 is considered economic contraction.
  • Expectations are that China's PMIs will spike up in the coming months due to government stimulus.
• As full disclosure, The Arora Report has published new buy zones for Xtrackers Hvst CSI 300 China A Shs ETF Class A (ASHR) and iShares China Large-Cap ETF FXI in The Arora Report’s ZYX Emerging. There is also a new buy zone for emerging markets consumer Columbia Research Enhanced Emerging Economies ETF ECON in The Arora Report’s ZYX Emerging. Emerging market consumers are getting rich and provide one of the best opportunities for long term investors. Instead of chasing the price on Chinese stocks and ETFs, prudent investors should consider being highly selective. 
• In The Arora Report analysis, investors are ignoring two risks in China:
  • The traditional geopolitical risk, especially related to Taiwan.
  • The risk of Trump being elected. Trump is proposing 100% – 200% tariffs on Chinese goods. Such tariffs will negate much of the benefit from the Chinese government stimulus.
• Unlike last week, the optimism from China is not carrying to the U.S. for the following reasons:
  • Stellantis NV STLA, the owner of Chrysler, Jeep, and Fiat, is giving poor guidance.
  • Volkswagen A G Unsponsored Represent 1 10th Sh ADR VWAGY is also providing poor guidance.
  • Stocks of General Motors Co GM and Ford Motor Co F are coming under pressure.
  • Negative sentiment from Europe is carrying to the U.S.
  • East coast dock workers may go on strike, disrupting commerce.
• Also not helping this morning is that quarter end window dressing is almost over.  In window dressing, some money managers buy the best performing stocks of the quarter so that they can show their clients in the quarter end reports that they were holding the best performing stocks.  This was partially the reason for the recent strength in NVIDIA Corp NVDA and other AI stocks.

Magnificent Seven Money Flows

In the early trade, money flows are positive in Apple Inc AAPL.

In the early trade, money flows are neutral in Microsoft Corp MSFT, Alphabet Inc Class C GOOG, and Meta Platforms Inc META.

In the early trade, money flows are negative in Tesla Inc TSLA, Amazon.com, Inc. AMZN, and NVDA.

In the early trade, money flows are negative in SPDR S&P 500 ETF Trust SPY and Invesco QQQ Trust Series 1 QQQ.

Momo Crowd And Smart Money In Stocks

Investors can gain an edge by knowing money flows in SPY and QQQ.  Investors can get a bigger edge by knowing when smart money is buying stocks, gold, and oil.  The most popular ETF for gold is SPDR Gold Trust GLD.  The most popular ETF for silver is iShares Silver Trust SLV.  The most popular ETF for oil is United States Oil ETF USO.

Bitcoin

Bitcoin BTC/USD is seeing some selling along with junk stocks.

Protection Band And What To Do Now

It is important for investors to look ahead and not in the rearview mirror.

Consider continuing to hold good, very long term, existing positions. Based on individual risk preference, consider a protection band consisting of cash or Treasury bills or short-term tactical trades as well as short to medium term hedges and short term hedges. This is a good way to protect yourself and participate in the upside at the same time.

You can determine your protection bands by adding cash to hedges.  The high band of the protection is appropriate for those who are older or conservative. The low band of the protection is appropriate for those who are younger or aggressive.  If you do not hedge, the total cash level should be more than stated above but significantly less than cash plus hedges.

A protection band of 0% would be very bullish and would indicate full investment with 0% in cash.  A protection band of 100% would be very bearish and would indicate a need for aggressive protection with cash and hedges or aggressive short selling.

It is worth reminding that you cannot take advantage of new upcoming opportunities if you are not holding enough cash.  When adjusting hedge levels, consider adjusting partial stop quantities for stock positions (non ETF); consider using wider stops on remaining quantities and also allowing more room for high beta stocks.  High beta stocks are the ones that move more than the market.

Traditional 60/40 Portfolio

Probability based risk reward adjusted for inflation does not favor long duration strategic bond allocation at this time.

Those who want to stick to traditional 60% allocation to stocks and 40% to bonds may consider focusing on only high quality bonds and bonds of five year duration or less.  Those willing to bring sophistication to their investing may consider using bond ETFs as tactical positions and not strategic positions at this time.

The Arora Report is known for its accurate calls. The Arora Report correctly called the big artificial intelligence rally before anyone else, the new bull market of 2023, the bear market of 2022, new stock market highs right after the virus low in 2020, the virus drop in 2020, the DJIA rally to 30,000 when it was trading at 16,000, the start of a mega bull market in 2009, and the financial crash of 2008. Please click here to sign up for a free forever Generate Wealth Newsletter.