Dear Followers, I'm putting up the full post of my 30 Aug writeup 'An Incredible Tale of two Greats!' on my blog today on 30 Sep 2021. POEMS clients of mine & PATREON subscribers receive it on 30 Aug 2021. To subscribe to PATREON, pls click here.
"Dear Clients . Another month, another free-wheeling SPX new highs & another draconian policy from China! What an incredible tale of two Greats! . First an apology for the lateness as I took a little longer to figure out the Chinese situation. . 1) US markets:
A quick recap on what I said in my 16 Jun writeup: '..Currently a bullish Cup & Handle pattern has manifested itself & an authoritative breakout will likely see SPX targeting 4420+/-..'. On 26 Jul, SPX (S&P500 Index) closed at 4422 and hovered below 4422 for the next nine market days straight (thus giving significance to this level) before breaking out further to achieve new highs. See Chart 1..
. Can the SPX continue to inch up? TBH, nothing has been broken yet. Blue uptrend lines T1 & T2 that I've labelled on the Chart since May 2021 have held up & price action remains firmly in the upper segment of Bollinger Bands*. . However I remained biased towards the bearish case and in conjunction with the Negative Seasonality which lasts til October, I'm of the view that we are more likely to see a garden-variety pullback or correction in SPX within the next 1-2 months. Reason is as follows:
While the RSP ETF (equal weighted S&P500 Index) has indeed broke out through the previously mentioned resistance (see my 18 July writeup for reference), the no. of component stocks in the SPX that are exhibiting a P&F (Point & Figure) buy signal remains lower than I would like to see: The Bullish Percent Index (BPI) for SPX is currently at 68%, which is only 4 points higher than the level I mentioned in my 18 July writeup. As explained previously, for SPX that is still hitting new highs every other day, I'd prefer to see BPI around the 80-85% level or higher. See Chart 2 above. . In any case, bcos the tier 2 & 3 US stocks broadly aren't showing that same type of bullish & steady momentum of those mega caps stocks (which are the ones pushing the indices up steadily), traders are finding it harder to make decent profits. . The situation I'm seeing now reminds me of those price action extensions I've seen & mentioned in my writeups prior to the Jan 2020 & Jan 2018 tops. And we all know what happened to those tops. . *Side note - now for those who wish to have an idea where the next potential upside target for SPX, pls drop me a line so I can share with you the target level & the methodology to derive it. . . 2) Chinese Tech stocks: The 2021 Chinese tech stocks massacre started off as a small wave in the cancellation of Ant Financial IPO which then rolled on to become a tsunami of epic proportions that is today. . If Temasek who has all the resources at their disposal to perform the necessary due diligence (which should include active monitoring of regulatory developments) couldn't smell trouble, I reckon no one could. (https://www.businesstimes.com.sg/government-economy/temasek-bet-on-chinese-tech-firms-just-before-share-collapse) . The market was led to believe that an overconfident Jack Ma wrongly stepped on the Chinese Regulators' toes back in Nov 2020. Then we hear of the need to 'comply with national policy objectives' (read as no more for-profit tuition centres so as to improve birth rate, among others) and that Chinese Corporates must allow 'sustainable competition (no anti-competitive practices)'. Next themes were 'Common Prosperity Over Profits' & ‘Third Distribution’. . Now the market talk is how Xi is throwing one big stone (i.e. using 'national policy objectives' & 'common prosperity' as a front) to kill many birds, ie. all these 10 months worth of policies are actually 'designed' to bring down as many of the political class and business elites preemptively to prevent them from uniting against him from staying in power beyond 2022. (https://www.wsj.com/articles/xi-jinping-deng-xiaoping-dictatorship-ant-didi-economy-communist-party-beijing-authoritarian-11628885076) . That & all, I guess have been well known.
Now the interesting thing is if you take a closer look at the Shanghai Composite Index (all stocks composite), Shenzhen Composite Index (all stocks composite) & ChiNext Index, you may be surprised to see that each of them only dropped 5.6%, 2.8% & 8.9% respectively (using year high to last Friday close), not exactly the sort of bear market decline (>20%) the headline news are telling us now. See Chart 3 above. So it appears that the attack on listed corporates has been only on a pretty narrow set of firms that western (or foreign) money managers are mostly engaged in. I leave you to draw up further conclusions on this angle and perhaps you can share more insights with me or correct me if I'm wrong. . Since this is an exogenous event and no ones knows when the regulatory actions may ease or end, I recommend two possible actions: 1) Avoid taking direct positions on the Chinese Tech stocks 1st since most of the said stocks are still on downtrends & no one knows who else may be in the crosshair of the Regulator. 2) If you remain bullish in Chinese tech stocks, then taking a position in the Hang Seng Tech ETF or Hang Seng Index ETF will offer you diversification with no single stock exposure, thus lowering your overall risks. When regulatory action eases off and the trend reverses, then taking a direct position may make more sense. IMHO, I prefer Hang Seng Index ETF (2800.hk) with 35% Financials & 26% Tech exposure. . In every crisis lies a great opportunity, what do you think? . As usual, Live Long & Trade Well. . Thank you & regards .