MSCI will on June 20 announce whether it would finally include China’s domestic A-shares in its global indices.
The US index provider last June delayed for a third straight year the A-shares’ inclusion into its benchmark $1.5tn emerging markets stock index, citing regulation worries and accessibility for global investors.
Inclusion on the index would have been a major step forward for Beijing as it attempts to open up its financial markets and attract foreign capital.
Ahead of this year’s decision, China has embarked on a series of new actions aimed at addressing these concerns. Its banking regulator has launched a “regulatory windstorm” while the central bank has made the first move to ease capital controls, providing much needed liquidity to the offshore renminbi market.
Meanwhile, BlackRock has for the first time publicly backed the inclusion of onshore stocks in MSCI’s indices and Chinese officials have even criticised dividend-dodging companies, dubbed “iron cockerels”, and promised extra scrutiny.
We’ve had a good two-way crude oil market since the first of the year which has helped hold crude oil in a relatively narrow range as aggressive traders continue to play the long side, in anticipation of a balance between supply and demand.
This year began with an oversupplied crude oil market, but with a bullish tone set by OPEC when they decided to start reducing output in an effort to trim supply and stabilize prices. On paper, the idea seemed bullish. What they didn’t expect, however, was the surge in U.S. production that skewed their forecasts and timetables for global supply and demand to reach a balance.
For nearly six months, traders have been pelted with stories nearly every day telling them about OPEC supply cuts and increased U.S. production. The stories seem to have neutralized the markets to a point where crude oil prices have become range bound.
In order for a market to become range bound, some major market player has to be selling enough crude oil to stop a rally and some major market player has to be buying enough crude oil to stop the decline.
However, inside the trading range we’ve seen several pockets of volatility and these moves can only be blamed on the speculators and namely, the hedge funds.
If you’ve traded speculative markets, I’m sure you’ve noticed that markets come down faster than they go up. Essentially, this is because speculative buyers tend to be very careful about where they buy or enter the market, but when it’s time to sell, they don’t care what they pay to get out.
I recently interviewed Prechter, who released a ground-breaking book, “The Socionomic Theory of Finance,” at the end of December. In the 813-page book, which took 13 years to write, he proposes a cohesive model that takes into account trends in sociology, psychology, politics, economics and finance. I highly recommend the book.
As I’ve explained here, Elliott Wave theory says public sentiment and mass psychology move in five waves within a primary trend, and three waves in a counter-trend. Once a five, or V, wave move (the waves are sometimes described in Roman numerals) in public sentiment is completed, it is time for the subconscious sentiment of the public to shift in the opposite direction, which is simply a natural cause of events in the human psyche, and not the operative effect from some form of “news.”
As one reviewer on Amazon wrote about Prechter’s new book: “This [cohesive] approach allows a measure of prediction on the basis that social mood fluctuates in fractal waves, and knowledge of them allows one ‘to achieve some measure of success in forecasting the direction, extremity and character of financial, social, political, cultural and economic trends.’ ”
Here’s an edited version of the interview, in which Prechter gives his outlook for the U.S. stock market, the general theory of Elliott Wave analysis and his new projects.
Avi Gilburt: You’ve said that, once the stock market tops, you expect a major bear market and economic contraction to take hold. What is your general timing for this to occur?
Two rate hikes since last year have weakened the dollar. Why is that, and what’s ahead for dollar, currencies & gold? And while we are at it, we’ll chime in on what may be in store for the stock market…
The chart above shows the S&P 500, the price of gold and the U.S. dollar index since the beginning of 2016. The year 2016 started with a rout in the equity markets which was soon forgotten, allowing the multi-year bull market to continue. After last November’s election we have had the onset of what some refer to as the Trump rally. Volatility in the stock market has come down to what may be historic lows. Of late, many trading days appear to start on a down note, although late day rallies (possibly due to retail money flowing into index funds) are quite common.
Where do stocks go from here? Of late, we have heard outspoken money manager Jeff Gundlach suggests that bear markets only happen if the economy turns down; and that his indicators suggest that there’s no recession in sight. We agree that bear markets are more commonly associated with recessions, but with due respect to Mr. Gundlach, the October 1987 crash is a notable exception. The 1987 crash was an environment that suffered mostly from valuations that had gotten too high; an environment where nothing could possibly go wrong: the concept of “portfolio insurance” was en vogue at the time. Without going into detail of how portfolio insurance worked, let it be said that it relied on market liquidity. The market took a serious nosedive when the linkage between the S&P futures markets and their underlying stocks broke down.
Markets regulator Sebi has directed brokers to square off all existing open positions in the equity derivatives segment they hold for Vijay Mallya and the six former officials of United Spirits who were banned from the market last week.
The fresh directive by the capital market regulator has been made through an e-mail to stock exchanges yesterday.
“The trading members are advised to square off existing open positions in the futures and options segment, if any, for the persons/entities mentioned in the above order and also ensure that no fresh positions are created for the said persons/entities,” an NSE circular said quoting the Sebi directive.
However, the regulator has not given them a time-line to do so.
Sebi had last week through an interim order, barred Mallya and six former officials of USL from entering the market, after the CBI charge-sheeted them in a money laundering case involving a loan IDBI Bank.
The CBI also charge-sheeted and arrested eight IDBI Bank officials, including its former chairman Yogesh Aggrawal in the case for their role in bypassing lending norms to extend Mallya Rs 950 crore loan in 2010.
I believe that successful options trading requires a different mindset from the traditional “rules of success” for most directional traders in stocks and futures products.
First and foremost, I believe you need to take profits early and often. We’ve all been hit over the head ad nausem about the old maxim “cut your losers short and let your winners run.” This is a truth I believe holds true for most directional traders, but I don’t believe it holds any currency with consistently successful options traders.
Speaking of direction, I believe nobody knows the next direction the instrument you trade will move. Nobody. Plenty have ideas and hunches, and often they’ll be right. But the truth is, a coin flip has nearly identical odds. This is why I trade options positions that either don’t require me to guess a direction, or provide me with plenty of opportunity to make money even when I’m leaning in the wrong direction.
Immediately contradicting the item above, I believe in fading moves (especially, violent down moves). The best traders and investors are willing to put on positions the majority of market participants find hard to put on due to fear. Since the majority of market participants are net losers, I’ve got to find more opportunities to join the minority.
I believe in contradictions. I believe in breaking the rules. Rules are guidelines, nothing more. Nobody got ahead in this world by following the rulebook and not daring to make mistakes or look like an ass from time to time.
I believe in getting paid to wait. Time is money. Wherever possible, I want to have positive theta on my side. The odds are with me whenever this is the case.
Speaking of odds, I believe in frequent trading. Common wisdom wants you to believe that “over-trading” is the common cause of death for most retail trading accounts as commissions steadily drain your account. In many cases this is true (especially if your commission rate is obnoxious). But for me, I’m putting on trades with the probabilities in my favor. The more instances of opportunity I can get myself into, the more the law of large numbers and favorable probabilities will materialize to my bottom line.
In order to trade frequently, I believe in trading incredibly small so that I can spread my opportunity across as many instruments as possible, diversifying my risk. Call me “One-lot Seany.” I’ll proudly wear that name tag.
I believe that volatility retraces from spikes or reverts to the mean much quicker and predictably than most would have you believe. Thus, I believe in selling fear. Fear subsides.
I don’t believe in stop losses. I believe in adjustments. Options trading gives you, um…. options. When positions go against me, all is not lost. Often times, there will be plenty of opportunity to roll strikes to collect additional credit which improves my odds of success, or roll positions out in time to in effect “buy myself more time” for the trade to play out.
The reason adjustments work: I seek to enter credit spreads when volatility is elevated (see #9 above). Therefore, if my position is getting tested on the upside, volatility will likely be shrinking which further aids my short volatility position. If I’m getting tested on the downside, volatility is likely remaining high (or increasing!) which gives me more juicy premium to sell into, which then results in collecting more cash and effectively lowers my breakeven points on the downside, thus improving my odds of success.
I believe in net market neutral exposure for my portfolio.
To help achieve neutral exposure, I believe I should always have a short delta (but positive theta — paid to wait) position in the general indexes. Since the majority of my individual positions will be short volatility and benefit from a stable or slowly rising market, I need to have short index positions which will benefit when markets are receding and volatilities are rising.
I believe in making stocks and markets work to beat me. They will win from time to time, but they will have to earn it with outsized moves. If the stock or market is too lazy to come get me, I’ll gladly collect its coin and move on to the next trade.
I believe the only true edge in any marketplace is Buying Power.*
CNY mid rate for the day, little bit weaker for the yuan
Open market operations (OMOs):
inject 10bn yuan via 7-day reverse repos
inject 10bn yuan via 14-day reverse repos
Small injections (which mean today is a net drain); watch for more stress in HK yuan borrowing markets today. Yesterday saw surging rates for overnight (and longer) yuan borrowing. Likely we’ll see the same again today.
By limiting injections into money markets the People’s Bank of China makes borrowing yuan more expensive and therefore shorting yuan more expensive. The PBOC is trying to discourage yuan shorts.