#$ssec

The stock market is thriving.  Many indexes are setting new all-time highs including the S&P 500 and Nasdaq 100.  But the euphoria is not limited to the US.  World markets are also moving higher and setting records.  All the equity world is in celebration mode except one place.  Chiner, um, I mean China.  In a world of new highs the Shanghai Composite is no where near its record.  In fact it may be the only major world market that is falling.

The chart below shows he Shanghai composite over the past 2 years.  Falling from a peak over 5000 in mid-2015, the Composite retraced 78.6% of its move higher before finding support at the same time as world markets in February 2016.  It moved higher from there in a long slow uptrend for the next 15 months.  That move of 25% was impressive, but still left it more than 35% below its peak valuation.  And then it did something other markets did not.  It started moving lower.

It broke the rising trend support in the middle of April and reached the 200 day SMA a week later.  It paused there for a week before resuming the move lower.  The next few weeks could prove critical for the Composite.  It is less than 60 points from 3000 and what has been a support area in September 2016 and January 2017.  A break below this level could open the flood gates for a move lower.  

But if it holds above there it is still not great news.  A hold would suggest a sideways range is forming between 3000 and 3300.  Not horrible but also not good in a world of rising markets.  The Shanghai Composite is in trouble again until it can get back over 3300.  Until then it is at beast a range bound market and at worst it has blinked and is dead money.

Last week, I put out my monthly letter to clients of Ritholtz Wealth Management. Here’s a snippet on EM stocks that should set the stage for what I will show you next…

I want to point something out about emerging market investing in general: as a category, it is more despised than at any time I can remember since 1998. If you recall, that was the year of the Asian Contagion and the devaluation of the Russian ruble. Forward returns for the asset class from that moment on, were absolutely extraordinary over the next decade.

Emerging market stocks have underperformed developed markets for almost eight years now. A regime shift is inevitable, now that expectations, sentiment and valuations are so thoroughly demolished. We cannot predict the start of this new regime, but catching it requires building positions early. We are getting the job done for you.

During one week last month, the two largest emerging market exchange traded funds, Vanguard Emerging Markets Stock Fund and iShares MSCI Emerging Markets Index Fund, witnessed $6.5 billion in outflows, which represents 10% of the funds’ total assets under management! In just five days, investors ripped a tenth of every dollar allocated to the asset class through these funds.

We’re not prepared to call a bottom for the EM category, but if it turns out that this was the bottom, it would be poetic justice on a monumental scale. We’ll save the news clips just in case.

October 16, strategists at HSBC inform us that EM buying is back. This coincides with the latest commentary surrounding the Fed’s now-stymied efforts to “normalize” rates. HSBC says EM fund buying came back in a big way last week, but that most of it was in ETFs. Traditional EM mutual funds continued to lose AUM. So perhaps it’s a trade.

Two charts below illustrate October 9-16 flows into EM funds with the longer-term flows in context (EM still a net loser of assets on the year):

Says HSBC:

In the second week of October 2015, EM equity funds managed to snap 13 weeks of continuous outflows to post positive flows. Easing volatility across emerging markets and a relief rally in EM equities (MSCI EM index up by 7.2% m-o-m) helped to arrest the exodus of funds from the asset class. EM funds have already suffered USD62bn worth of assets moving out so far this year – highest in the last five years. EM equity funds were hard hit in Q3 2015 with redemptions at their fastest pace (net outflows of USD48bn in ten weeks in Q3 2015), but the last few weeks saw withdrawals ease significantly and finally, recorded their first positive flows in the week ended 14 October. Encouragingly, the inflows appeared broad-based with investors subscribing to all three major EM regions.

Josh here – so was that it? Have we seen the definitive flush? My gut says “too easy, probably has to get worse.” But that’s consensus, right?

In the meantime, EM stocks have rocketed off their recent lows, with the Shanghai up 15% in just a couple of weeks.

Sources:

Slight Edges Ritholtz Wealth Management – October 15th 2015

Stocks are getting beaten with an ax handle this morning. Everyone has an explanation. Some of them are close to right.

Some quick observations:

This isn’t about the Fed possible hiking in September. a) The Fed isn’t going to f-ing hike in September for reasons I’m about to explain b) When the Fed hikes it will be the most over-analyzed event in economic history. 

This is coming from China. As painstakingly detailed last month, China’s market is crashing. The Chinese government is doing what government’s have done for 500 years: trying to stop the panic. It won’t work. It never works. 

The Shanghai Composite (see below) is the tail waging the global dog for all stock markets. That’s very bearish short-term. By itself the SSEC doesn’t mean anything. The concern is the unknowable impact of China’s efforts on other markets.

I started running money professionally almost exactly as Long Term Capital Management was blowing up and taking the world with it. I learned two things: 1. Don’t underestimate the impact of currency adjustments 2. Forced sellers can crash markets in ways that mock your feeble blue chip hiding places.

I’m not an expert on the Chinese stock market. Neither are the Chinese, obviously. But I’m pretty good and gauging mass mood. This sell-off is about central bank de-levering and the panic that will kick in about mid-day this morning when people realize their net worth has dropped 30% in the last two weeks.

Typically when the public starts paying attention to the market it’s a decent time to start buying. Here’s a chart of Google searches for “Stock Market” vs the S&P500 for 2011 and 2014:

Interest peaked as stocks bottomed. 

Here’s how the same search / stocks combination looks for 2015 so far:

We’ve got a ways to go yet but based on the S&P500 futures being down 70pts heading into the open today Main Street Investors are about to get very interested in stocks. The stock market will lead morning talk shows and evening news today. That doesn’t mean we’re at a bottom but it’s a start.

It’s too late to sell and too early to buy as far as I’m concerned. I’m running charts and making lists of stocks I’d like to buy at lower prices. Charts aren’t perfect but in an emotional market they beat the living hell out of fundamental analysis.

The best equity analysis incorporates everything. Technicals, fundamentals, socio-economics... all of it. 

Here are some charts I’m watching as we head into Boomtown Rat Monday...

The Great Fire of London began at a bakery in Pudding Lane on September 2nd, 1666. A few hundred houses caught flame in the vicinity and then the wind took the fire east, burning everything in its path. The first thing Londoners did was try pouring buckets of water on the burning buildings. This didn’t work so the next thing they attempted was escape, a crush of humanity piling up along the Thames waiting for boats to get them clear of the inferno.

By September 4th, it became clear that escape for everyone would be impossible. The fire had to be brought under control immediately to save lives, not just property. The king ordered a firebreak, which involved pulling down all of the houses in the fire’s path using hooked poles. When that process proved not to be fast enough, the king ordered a massive gunpowder explosion – akin to blowing up a neighborhood with a bomb – so as to save the rest of the city.

After four days of fighting the blaze, they had finally succeeded. Only one-fifth of the city’s buildings were still standing, with an estimated 13,000 private dwellings either burned to the ground or deliberately destroyed. Miraculously, historical records indicate that only six people died.

200 years later, the residents of Chicago would not be so lucky after Mrs. O’Leary’s cow kicked over a kerosene lamp. We’re told by Harper’s that the Great Chicago Fire of October, 1871, “burned for 29 hours, cutting a destructive swath through 17,450 buildings on 73 miles of streets, leaving an estimated 300 people dead, 100,000 homeless, and $192 million worth of property destroyed.” Temperatures reportedly reached levels “high enough to disintegrate stone into powder and granite into lime, melt iron (2000º F) and steel (2500º F), and explode trees from their own heated resin.”

The windy conditions for which the city is famous made the fire nearly impossible to contain. The only reason the South Side was saved was that the order finally came down to make a firebreak. City officials commanded that buildings be blasted with dynamite to create some space in which the fire could peter out rather than spread further.

Last week, Chinese stock market officials attempted to douse the flames of investor panic with increased liquidity and with words. Neither approach worked, the panic spread the crash intensified. This week, they called for a firebreak. Halting thousands of stocks from trading to contain the panic, while simultaneously issuing new rules prohibiting executive stock sales and new IPOs. They’ll do some long-term damage with those measures, to be sure, but their hope is to bring the flames under control and then sort the damage out later.

The firebreak may have worked, at least temporarily. After a 32% crash in Mainland Chinese stocks, some 1600 or so issues simply ceased to trade. The 600 stocks that did manage to open in the last session bounced hard, the biggest one day jump for the Chinese market since 2009.

Maybe a bit of distance and time from the fire of the last few weeks will cool the Chinese trading populace off enough so that rational behavior can take hold. That’s certainly the hope of the regulators. Or perhaps not. Kevin Ferry doesn’t believe the market participants in China are actually investors in the first place, just gamblers. What happens in the next few days will be extremely important.

It’s steaming hot in NYC but it’s already December in Shanghai! The Hang Seng Index ($HSI) and Shanghai Composite both dropped another 6% today. With that the $SSEC chart is all the way “down to the presents” under the Christmas Tree of Death at about 3,500.

I’ve updated the chart from last weekend: 

As discussed the Chinese are rather adorably throwing money and credibility away in a futile attempt to get investors to stop selling. In addition to $19b in purchases the government has slapped restrictions on shares that can’t be sold. Between those lock-ups and 10% down daily limits more than 2/3rds of the Shanghai Stock Exchange was closed for trading today.

Governments remain winless against panic in roughly 400 years of stock trading. You can’t buy that kind of certainty. 

The chart is complete but all bets are off for the next leg of China’s experiment with free markets. 

Full column below.

Reprinted from July 4:

The Great Fall of China (and other awesome puns)

China forming a Christmas Tree of Death. The Shanghai Composite is down about 30% in 3 weeks. In response the gov’t is outlawing short-selling, actively manipulating prices into the close and forcing brokerages to buy up to $19b in stocks (the equivalent of a moderate sized mid-cap mutual fund… roughly a brick in the Chinese Wall).

The irony of gov’t manipulation is that it only works if it’s a really convincing rumor. Traders have to fear a squeeze higher more than they fear a crash. The absolute worse case scenario is the government openly failing to support prices. There’s nothing scarier than realizing the grown-ups are just as clueless as everyone else. When a government explicitly states that it’s going to manipulate a marketplace participants invariably panic. In fact, there may not be a better predictor of an imminent price collapse on earth than overt government intervention.

In 2008 the SEC tried to stop traders from shorting shares of financial stocks. Because how could anyone have an legitimate reason to be shorting pigs like Citigroup in 2008 (sic)? What the SEC didn’t or couldn’t do was stop investors from selling long positions. Since would-be buyers were being flat-out told there was no demand for the stocks they waited for lower prices. Desperate sellers fled and the XLF fell 45% in 30 days (chart via ZeroHedge):

The Chinese stock market has effectively doubled over the past year and a full-scale mania has gotten underway with mainland individual investors opening millions of brokerage accounts a month. This is a good thing, not a bad thing, as the remaining phase of China’s economic rebalancing must include a consumer component to offset the declining growth from infrastructure and state-sponsored real estate development.

But even good things can go too far.

As of last month, Chinese stock market investors (traders?) had built up $375 billion in margin loans, a massive increase over the levels just six months ago. The Chinese securities regulators aren’t sitting back and watching, they’re acting. They’re cutting out some of the more extreme forms of margin lending and leverage and making it easier for short-sellers to come into the markets.

Here’s Bloomberg:

Allowing funds to lend their stock holdings will expand the pool of equities available to short sellers, who have relied primarily on brokerages to supply them with the stock needed to execute the bearish bets. While short selling on the Shanghai bourse climbed more than threefold in the past nine months and reached a record 7.46 billion yuan last week, the amount still pales in comparison to China’s $7.3 trillion market capitalization. The CSRC said Friday it also expanded the number of stocks available for short selling to 1,100.

China should cool off a bit but this does not mean investor enthusiasm needs to be completely crushed. Instead, we’re simply watching a market mature and become sophisticated enough to keep expanding. This is in-line with similar moves to rein in wild behavior by the new Chinese president Xi Jinping, such as the corruption crackdown and the cooling off of the Macau casino boom. It’s smart.

Source:

China Futures Tumble on Trust Curbs, Expansion of Short Selling (Bloomberg)

No matter what, there’s always a stock that somehow retains its popularity even as it incinerates millions of dollars. 

Alibaba (NYSE:BABA) is one of those stocks. Yes, traders had a chance to grab onto a piece of that 40%-plus move late last year. But ever since this name topped out in November, it’s been nothing but a painful ride lower. The gains are gone. And all we’re left with is false starts and lower prices. 

Each attempt to stay above the 20-day moving average has been met with more selling. So while this month’s action is encouraging, I’m not exactly sold that we’ve seen the bottom in BABA just yet:

Despite the poor performance over the past five months, it feels like BABA pops up in almost every conversation I have about the markets. It’s all over Twitter. Nearly 17 million shares exchange hands each day. We just can’t get enough of the “Amazon of China”. 

But maybe we’re fixated on the wrong stock. 

Instead of trying to catch the falling BABA knife, might I suggest taking a look at Baidu (NASDAQ:BIDU) -- the “Google of China”-- instead?

All the main ingredients are still there. You get your China play, complete with catchy comparison to an American tech giant. But this time, you actually get to buy a stock that’s enjoying a long-term uptrend.

Here’s a weekly look:

I love how BIDU respects the 50-week moving average. A solid test of support materialized earlier this month. That should give us the beginnings of a nice bounce here. 

If we zoom in to a  daily view, you can see how BIDU has taken back its 50-day moving average, finishing in the green during 3 of the past four sessions:

I’ll like this move even more if BIDU can take out $220. That should break this stock free of the downtrend that has trapped it since early November. 

When it comes down to it, there’s really no debate. What would you rather buy? A free-falling IPO with very little price history? Or a solid bounce off support from a stock that’s in a bigger uptrend?

No contest. It’s BIDU every time.