洪灝|股市韭菜主义(Stock Market Populism)

这是我们20200308的报告《洪灝股市韭菜主义》的英文原版。感谢阅读。

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It is hard to believe that after one week of epic volatility and one-thousand-point daily churns in the Dow, the market indeed rose less than 2% for the week. Last Friday was the anniversary of the S&P500 making the “devil’s bottom” at 666 on March 6, 2009. But few seem to still remember such a gut-wrenching anniversary, as the economy extends the longest expansion on record.

In China, the “epicenter” of the coronavirus, speculation fervor persists. Some stocks have more than doubled in the past month. Yet a quick look at these companies’ financial statements reveals that these were fatal attractions: they tend to have very heavy debt loads and heightened earnings uncertainties. 

To make hay while the craving for profit raves, a stock jock offered to let people see the tickers in his portfolio for a fee on an internet message board. Overnight, he was one million yuan richer – faster than profiting from trading stocks. To their dismay, the paying customers found 500 stocks in the stock jock’s “portfolio”. They might as well just look at the CSI500 index - with 500 small- mid-cap index members that are doing quite well amid the speculative frenzy.

Bloomberg Business Week also reports how the US retailed investors used subreddit message boards to push users to buy call options on stocks with extremely large volume. Collectively, these small investors move the market price by exploiting flaws in dynamic option hedging strategies. The extreme call buying volume obliged these strategies to buy more in order to maintain their exposure to the market. The Chinese stock market lingo calls retailed investors “chives”, as chives grow fast and can be harvested often. With the new found collective power via social media, the chives have overpowered the pros. Welcome to the era of stock market populism. 

With the emerging power of retailed investors, we have found intriguing divergences within the Chinese market structure. The pressure on oil price is unlikely to alleviate in the near term, as Saudi executes its shock-and-awe campaign on the Russian. Speculators continue to liquidate their positions accumulated at a very high level historically. And VIX, historically a contrarian indicator for oil price, touched 50 amid Friday’s market havoc (Figure 1).  As oil price plunges, reflecting the toxic in the oil market, the Shanghai Composite seems to be resilient (Figure 2). PetroChina and Sinopec, the two oil barrels of the Shanghai Composite, with heavy index weight but limited free float, will reflect the oil plunge over the weekend in the coming week, and pressure the composite.

Figure 1: Speculative positions in oil receding; oil price will continue to be under pressure in the near term.

Source: Bloomberg, BOCOM Int'l

Figure 2: Oil price and global airlines diverge from the Shanghai Composite.

Source: Bloomberg, BOCOM Int'l

Meanwhile, the 10-year Chinese government bond yield has fallen to record low, implying a substantially weakened economic outlook. It is a stark contrast to the Shanghai Composite’s resilience (Figure 3). Consensus is looking for monetary stimulus, yet the PBoC’s repo transaction has been suspended for 14 days, and net liquidity injection has been neutral. The ulterior motive of the pundits who are rooting for stimulus package is really to pump the stock market – which actually has emerged unscathed from the wreckage of the virus spread. 

Figure 3: China 10-year yield diverges from the Shanghai Composite.

Source: Bloomberg, BOCOM Int'l

Spurred by heavy turnover, the ChiNext, a quintessential universe for the retailed investors, continues to surge and diverges from the Shanghai Composite (Figure 4). The velocity of turnover on the ChiNext board is the third fastest in history, and not far from its peak seen during the market bubble of June 2015. We wrote about the looming ChiNext bubble in our last report titled “Unconventional Risk Hedging Strategy at Cycle’s End” (20200302).

Figure 4: Market Turnover spurs the ChiNext surging, and the Shanghai Composite diverging.

Source: Bloomberg, BOCOM Int'l

With the Dow finding support at the 850-day moving average amid epic market volatility, we continue to believe that the US stocks will struggle higher from historic oversold conditions and extreme pessimism in the coming weeks. If no recession, the 850-day moving average will be a strong support for the US market, as it has been in the past. (20190919 “A Definitive Guide to Forecasting China’s Stock Market”) Pundits believe that Chinese stocks, especially the ChiNext at extremely overbought levels, can offer risk shelter for the extremely oversold global stocks. It is a reckless call. As discussed above, the Chinese stock market is diverging from fundamentals as implied by the oil market and trade data, and from the weakened outlook as implied by bond yield. And a ChiNext bubble is looming. At this juncture, a better bet should be that the US bounces back technically from the deep in the coming weeks - through enduring volatility and ugly news headlines. 

交銀國際 洪灝,CFA

2020-03-08

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