A-Share dilemma - break of trend or meteroic rise?
Looking at the long-term trend, the Chinese A-shares are trading within a pretty well defined range since the mid 1990's. This includes two meteroic bubbles that have risen as quickly as they've crashed. Despite these bubbles forming, they haven't caused any massive damage to the Chinese economy such as what we saw when other large bubbles broke down (such as Japan's 1980's bubble, or the US dotcom bubble).
Interestingly, each time the trend hit the lower end of the range, we've seen the a-shares shoot up meteroically. Fundamentally, I'm rather bearish on the Chinese market right now. They have an insane debt bubble combined with the news events coming from "trade war" problems. Most of the bubbles in the Shanghai Composite have come as a result of the Chinese govt's constant injections of liquidity and easing. This provides a window into a view of the debt bubble.
Recently, the lower end of the range was once again just hit, and we also have come to learn that the Chinese gov't is already back to monetary easing through various means. Based on history, you would think we may see another meteoric rise in the Shanghai composite index, but I'm not sure that will happen this time around. China is painted into a more difficult corner this time around, and they are more wary about stock bubbles like this nowadays. I think given the fundamental picture, we're more likely to break the long-term trend downward. If the debt bubble does in fact burst, this will certainly be the case. With that said, I think it may be prudent to buy some deep OTM leap calls on the Shanghai Composite (you can use the ETF
ASHR) to capitalize on a potential blowoff bubble formed from more easing once again.
Interestingly, each time the trend hit the lower end of the range, we've seen the a-shares shoot up meteroically. Fundamentally, I'm rather bearish on the Chinese market right now. They have an insane debt bubble combined with the news events coming from "trade war" problems. Most of the bubbles in the Shanghai Composite have come as a result of the Chinese govt's constant injections of liquidity and easing. This provides a window into a view of the debt bubble.
Recently, the lower end of the range was once again just hit, and we also have come to learn that the Chinese gov't is already back to monetary easing through various means. Based on history, you would think we may see another meteoric rise in the Shanghai composite index, but I'm not sure that will happen this time around. China is painted into a more difficult corner this time around, and they are more wary about stock bubbles like this nowadays. I think given the fundamental picture, we're more likely to break the long-term trend downward. If the debt bubble does in fact burst, this will certainly be the case. With that said, I think it may be prudent to buy some deep OTM leap calls on the Shanghai Composite (you can use the ETF
ASHR) to capitalize on a potential blowoff bubble formed from more easing once again.Disclaimer
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