Wednesday, October 10, 2007

When to Short China?

Eventually, there will come a time when you will look back and say to yourself, “Why wasn’t I short China? It was such a no-brainer…” The answer to that question has a lot to do with the dictum that the markets can stay irrational much longer than many of us can stay solvent. Ask anyone who was short tech stocks in 1999 and knew it was just a matter of time before they were proven right.

There are a number of ways to approach this problem, but ultimately you want to be short when the majority stops buying on the dips and starts selling into the rallies. When does this happen? Generally, when the short-term moving averages (such as the 10 day SMA) start to roll over and slip below the intermediate-term moving averages (i.e. the 65 day SMA) distribution is occurring.

In that same vein, ratio charts can be helpful to spot speculative trends as well. Keep your eye on the relative performance of the FXI versus the NASDAQ and remember that it is better to catch the easy middle part of the move than to call the turning points. Traders should aim for the easy money; let the so-called gurus (and bloggers) shoot for bragging rights and the easy headlines…


Mike G said...

I'm wondering if the best way to actually short China is to buy puts on the FXI index you mention? Is that what you would do? The last time I checked the options on that index did seem quite expensive though, large spreads, etc. Thanks.

Bill Luby said...

Hi alfamike,

I like the idea of puts because it limits losses. Regarding specific targets, FXI would be my preference; it has the added benefit of eliminating the concern about "right idea, wrong stock." There is also good volume and relatively reasonable spreads with FXI.

The other choice with a lot of options activity would be BIDU. You might want to consider FMCN too, as well as the three solar plays, which will likely fall faster and harder than the others if there is any hint of a potential bubble bursting: TSL; JASO; and LDK. Of course, LDK has already had more than their share problems, so the fear factor is already high there.

If you are also thinking of expensive as in high implied volatility, well you can't get away from high IV with Chinese stocks.

Finally, FWIW here is a list of Chinese stocks, sorted by YTD % change. This may give you some ideas about the relative pockets of frenzy so far.

Cheers, good trading, and don't forget the stops...


nodoodahs said...

Um, duh!

Go LONG the FXI with a TRAILING STOP. When your stop triggers, oooh, lookie, time to short?

Anonymous said...

The China Short is so beautiful so plainly written on wall, so perfect its the type of thing that will make trading legends. I am planning to short it just after the Olympics in Beijing. Perhaps a long commodities position is the best hedge as a Chinese crash/recession/depression will in variably cut commodities demand. I don't think there's any way the communist regime in China can manage this type of economic growth without significant volatility, the US government certainly could not.

Bill Luby said...


In considering the looming Olympic timetable, I am alternatively emboldened and put off by the prospect of shorting China pre-Olympics. I agree with you, however, that the Chinese will have more trouble managing their economy than their US counterparts.

Long commodities is a good hedge and perhaps a better outright play.



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