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Bulls, Bears and the Bursting of the China Bubble

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Markets are so quiet at the moment, you can almost hear the crickets. Volume has dried up and volatility has evaporated. Usually when that happens at this time of year, something comes along during the summer to jolt everyone awake. It will be something completely unexpected, although there will be the usual suspects out there saying “I told you so”.

For now the market just continues to drift sideways to slightly higher. I don’t see any big catalysts for massively higher prices over the next few weeks and any gains should be muted. The risks remain to the downside with complacency at very high levels.

RUT is the major index that concerns me right now. I can’t bring myself to get bullish when the monthly chart looks like this. There is a clear MACD cross and the divergence between RUT and SPX is concerning.

RUT
There was an excellent chart posted on Short Side of Long this week showing that the S&P 500 has spent the last 80 weeks above its 200 day moving average. The author states “The 5 year rolling return has been 5th best in 140 years (only beaten by 1929, 1937, 1987 and 2000). The bull market is currently the second longest in the last 80 years.”

80 weeks

Volatility is at multi-year lows. Potentially this could just mean we are going to see a run like we had in the 90’s and mid 2000’s. It’s not out of the question, but given we have already had one of the longest bull markets in history, I think the odds favour sideways action and mediocre stock returns over the next 5 years. Or, we have a pullback. Remember those things? No, me neither.

VIX

Emerging markets could provide some downward impetus as we’ve seen negative divergence on the chart recently. Remember it was emerging markets that led the mini selloff earlier this year so this is definitely one to keep an eye on. J.C. Parets of All Star Charts recommends being short provided EEM stays below $43.30.

EEMA

Matthew Phillips posted an interesting chart today on the change in luxury spending in Hong Kong. I’m hearing a lot of anecdotal evidence of huge capital outflows from China and this could be just the proof we’re looking for. China could be in one of the biggest bubbles of all time and only being propped up by the government. Long term I think it’s a great story, but in the short-term the risks of the bubble popping and the flow on effects to global markets are pretty high.

Hong Kong Luxury Sales

With volatility this low, iron condors are not that attractive so I’m tending to scalp using calendars, butterflies and diagonals while keeping duration short.

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2 Comments
  1. Chandran says:

    I have been waiting for the market to fall and get into some high volatility for a while now. There seem to be a lot of bulls in the market there – http://www.marketwatch.com/story/stocks-to-rise-10-in-six-months-eisenstadt-says-2014-06-04?link=MW_popular

    1. Yes, I think are lot of people are waiting. We might be waiting for a while by the looks of it.

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