Remember the weekend of February 1st-2nd? It was the weekend when the market hit its most emotional point regarding the Chinese flu situation. Within the financial community, talk about conspiracies and all other sorts of crazy theories were flying around. Reading my twitter feed that weekend felt like the world was about to end. The talk was so dire, I wrote a special Sunday night MacroTourist piece titled "BUY THE PERIODIC TABLE" in which I argued a massive stimulus was coming out of China and this was not the time to panic.
I was only half right. I was correct in that a massive stimulus was coming, but unfortunately the first wave was mostly monetary. And instead of sending commodities flying, it mainly propped up financial assets.
Let's look at what has happened to the Chinese stock market since that fateful weekend:
Straight up on a stick!
I can already hear the pushback - "the Chinese stock market is not a real market. It's manipulated."
Yeah, maybe that's true, but you could have still traded this rally and I am pretty sure the profits from the rally in the FXI Chinese equity ETF are the same colour dollars as any other profits.
But what about other "real" markets? Like the Nasdaq?
Don't send me your comments about how this market is "manipulated" as well.
I have no interest in debating what price indices should be at. I am only interested in what price they will be at.
That weekend at the beginning of February, with all the negativity flying through the air, with the Chinese stimulus on its way, I thought shorting was a poor risk-reward setup.
However, now that we have rallied hard, combined with the fact that the flu situation has not improved as much as I would have anticipated, leads me to think the right trade is now on the dark side.
At this point the fintwit-doomsayers-turned-infectious-disease-experts will be springing up with a "see! I told you so!" Yeah, ok, but aren't I putting out my short higher than the hole you sold into?
I have no ability to judge the seriousness of the Chinese situation. I am sympathetic to both sides, but I know one thing, the shorts have been run over so hard, it is now a difficult position to hold. It is no longer as crowded.
As I write this Monday morning, the stock market is down on Apple's warning that the Chinese supply disruption will be worse than expected.
Will we rally right back to new highs today? Could be. This market has made fools out of anyone who has tried to call the top.
Although the situation in China might not be deteriorating as quickly as the end-of-the-world'ers predicted, neither is it improving at the pace the optimists hoped.
Have a look at this video of the air traffic over China versus last year:
The country is so far from back-to-normal, it's not even funny.
Meat is piling up on the docks because they can't even get it delivered to the hungry people.
Thousands of containers of frozen pork, chicken and beef are piling up at some major Chinese ports as transport disruptions and labor shortages slow operations, people familiar with the matter said.
Deliveries are mounting at ports including Tianjin, Shanghai and Ningbo because there aren’t enough truck drivers to collect containers due to travel curbs imposed in the country to control the coronavirus, said the people, who asked not to be identified because they’re not authorized to speak publicly.
Ports are also starting to run out of electricity points to freeze the containers and some ships have been told to reroute to other destinations in mainland China and Hong Kong, the people said.
China is a massive importer of meat from South America, Europe and also the U.S., and has been boosting purchases to help ease shortages caused by African swine fever. The country increased imports of meat and offal by almost 50% in 2019 to a record of about 6.2 million tons, customs data show.
These are by no means scientific reasons to short the market. As I mentioned, my expertise does not lie in analyzing the medical situation on the ground in China. Rather, I try to understand what the market has built into its price, and where the surprises might come.
At this point, the Chinese stimulus has pushed up financial assets and burned the shorts like a piece of English toast. Few are rushing out this morning and saying, "here you go - the Apple news is the final straw that makes the market realize the situation is more dire than reflected in the price of financial assets." Well, that's what I'm predicting.
As to how you want to express that view, I am unsure. More nimble traders can take stabs at the dark side, understanding that volatility at tops often increases, so even if you are correct with call, be ready for some hard moves against you.
However, a better trade might be to buy NDX puts. Given the risk out there, I think they are remarkably cheap:
One last reminder - this is a TRADING CALL. Longer term, all of this China supply disruption means more stimulus throughout the world. The risks with this bearish short-term view is that the market sees through it and realizes the worse things get, the more stimulus will be applied.
Thanks for reading,