China’s rocket is launched – shares up 13% in a flash

Dear Trading Diary: The rocket put under Chinese shares on Monday by the PBOC’s massive easing operations (with more to come?) was not a bolt from the blue, as some pundits have it. No, in the previous week I had lined up my VIP Traders Club members that such an event was highly likely after the Fed had performed its first easing in four years with its decisive 50 bps cut.

And so I went long the China A50 index around the 11,200 level and waited. In fact, my wait was short-lived as the market zoomed up to the 12,300 mark on Tuesday for a massive 13% advance – the largest for many years – and continued up on Wednesday. I can only describe that as an historic hedge fund rout. Ouch!

My entry was at the low on the lower trendline and with the large mom div there, I figured the odds for a strong recovery were pretty high. But even the strength of that 13% surge surprised me and was a clear demonstration of the extent of the short interest in Chinese stocks – it was massive.

And on Thursday, it moved up even higher – right into my pink target zone that I had set the previous week well before the blast-off. And that set in place my first impulsive five up to signal the major trend had changed to UP.

For months we had been reading of the dire state of their economy with consumer deflation and real estate prices in collapse. Business and consumer sentiment was on the floor as their EV exports were under threat from proposed high EU tariffs. They were about to conquer the EV world with cheaper and better vehicles but those hopes were being dashed.

So what better conditions could there be for a sharp reversal in shares? Remember, bull markets always start from deep gloom – never from euphoria (as exists today in the US). My suggestion for the long China/short US spread seems to be right on the money.

And a great lesson for traders that to succeed, it is necessary to look beyond the obvious because it is often obviously wrong.

But to benefit, my timing had to be clinical (as they say in football). And it was.

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The rally has traced out its first impulsive five up which means the main trend for China is now UP. Of course, there are many pundits who believe this is just a short covering rally on its way to lower prices. Here is a typical one I saw today: ‘Nothing can save China‘. But that is what makes a market – two opposing views.

I have been asked why I remain positive on US (and China) shares (for now) when the background economic news continues to paint a grimmer picture?

This is because one of my litmus tests is the Junk Bond market (aka High Yield). These are bonds with higher yields issued by the riskiest companies that are well below investment grade. In fact, they trade more like equities than conventional bonds. And like equities, they are the first to get wiped out if the company runs into difficulties and is not able to service the debt.

This is a popular ETF that tracks a basket of junk bonds and it is obvious that prices are in a strong upward trend (yields falling). And the price now trades well above all of the MAs in a show of force. With many of the companies in the NatGas sector issuing junk bonds that are contained in this basket, the budding recovery in gas prices can only reduce the risk of these bonds getting into difficulties and to strengthen their finances,

Unless and until I see signs of a reversal I will remain with my long stance.

And to put the Chinese stock market into perspective against its main developing market rival India, here is a crazy chart showing the relative performance over the last 30 years

Isn’t that incredible? (India is the top line). China has produced some gigantic leading tech companies on a par with the US (India hasn’t) and its consumer sector is far larger. But still, facts is facts.

Update on my Sugar campaign: This market is on a flyer since I entered on 11 September at the 18.50 level. And this is because we have a developing weather situation in Brazil – one of the leading producers – that promises to cut next year’s crop substantially. In fact, we have what I consider to be a speculator’s dream setup. Some in the trade are calling for a large global production deficit next year and if the weather in the Asian producers co-operates, all bets are off for where prices will reach.

The most recent ATH is 36 in 2011 (also weather derived). My wave 1 or A high of last November set the high at the 28 cent level – only 8 cents from the 2011 ATH. The minimum extent of the rally is a wave C (a major third wave would extend much higher) that moves above the wave A high. And because C waves always extend beyond the A wave, my upper target is above the 28 level.

If the weather cooperates, my C wave could go on to test the 2011 high at 36. From the current 23 to 36 is 13 cents – and potentially a huge profit -if you can play the swings expertly. Of course, if we are starting a major third wave up, then maybe the 2011 ATH will be blown away. But for now, I am riding the sugar rocket towards my first target at the pink zone. We are almost there.

Update on my Gold campaign: Long time readers will know that I have been bullish Gold since at least last year. My stance was inspired by my reading of the charts and assessment of sentiment (as always). Of course, prices haven’t shot up in a straight line (until recently). But it has been making new ATHs almost daily – and it has the conventional analysts flummoxed. They cannot believe it is performing better than the Nasdaq while most view a US recession as highly unlikely. They figure why buy protection when you don’t need it?

Here is one classic quote from such a pundit: Despite supportive factors (for gold), some risks must be monitored. Investors should be cautious and stay updated on market developments, as a correction could be imminent at any time and could reach significant psychological levels at $2,600 and $2,500 in the near term.

Hah! In other words; “I have been bearish and wrong. I don’t understand what the hell is going on but I must frame that in the usual bland useless MSMspeak and earn my publishing fee“. Oh, and his targets have already been met – and exceeded.

Until recently, gold traders have been bearish for the obvious conventional reasons – yet the market has climbed strongly. So why did I become bullish when most were bearish?

The vast majority of pundits use conventional ideas of finance where if one lever is pulled, you always get that same result. Lower interest rates and you always get growth. It is the ’cause and effect’ model that applies in billiards. But is false when applied to finance.

One clue it is false: when a share is in rally mode, more investors want to buy it. The higher it gets, the greater the desire to own it (see Nvidia). But in the real non-finance economy, when the price of olive oil rises, more seek a cheaper alternative and sales drop as do prices (eventually).

I have used my unique Tramline methods for a few years now and the documented trading performance of my Phoenix account for example is testament that it works. Part of that success is derived from my Gold trading. If I had adopted the bearish stance of the conventional analysts, my account would have been wiped out by now. The road to ruin is paved with convention.

To succeed in trading, you need to look behind the obvious – and get your timing spot on. It’s that simple (but not easy).

For my blog readers – and Pro Shares members – I am following the venerable US Gold miner Newmont. A month ago I posted the chart showing my first major target at the $55 area. It has just reached that level

That is the level of my ‘b’ wave high and | expect to see a pull-back soon in my wave 2 or B. This dip should not be too deep but may last a few weeks before wave 3 or C kicks off (as shares collapse?). That is my Best Guess. Of course, with bullion being in an exponential up phase reaching the $2,670 ATH area, it could continue going north as its current wave 3 could extend further. But the prudent option is to take some profit on Newmont (and other miners) here as a major target has been reached.

I find it fascinating that the MSM has not exactly gone ape proclaiming the new ATHs in Gold (as they have with AI). There is a lot of scepticism out there, For me, that is a very bullish sign for the medium and long term. I am reminded of this apt quote: ‘History never looks like history when you are living through it’.

STOP PRESS Is this possible? The kids who have just been jailed for throwing soup in the National Gallery in Sunflower-gate 1 in 2022 have been followed by another Just Stop Oil (JSO) gang that has just done the very same thing on Friday in Sunflower-gate 2!

While there is a certain humour here and attacking an oil painting makes some kind of sense for JSO (to be re-named Just Stop Oil Paintings?), the point I want to make is that this very visible ‘defiance’ by these Gen Z members is a vivid example of the fast-declining respect for the law especially among the young to further a moral crusade. And no wonder with people who took a very small part in the summer’s ‘riots’ have been very harshly treated with lengthy jail sentences.

One of those 2022 Just Stop Oil protesters sentenced to 2 years jail said on receiving her verdict: “It is not just myself that is being sentenced today but the foundations of democracy itself“

I have a feeling she has hit a very big nail smack on the head. It is clear that democracy is in a very weak state in the West and our societies are undergoing seismic changes that will undoubtedly intensify.

And this will have huge implications for financial markets. This promises to get real exciting – especially after November 7th – the biggest test for democracy in the West!

Not only that, but the whole question of wealth distribution is getting another airing (the last major one was in the 2007/2008 Financial Crash). With the top 1% owning a record share of wealth, I cannot escape the feeling that the prime mission of our new Labour government is to hurry that process along at a rapid rate.

And what a picture – our champagne socialist rulers (gladly accepting fancy ‘work clothes’ and Taylor Swift and Arsenal tickets freebies) are presiding over a levelling up of UK wealth with huge pay rises for public sector ‘workers’ and tax hits to the middle class wealth creators.

Of course, the biggest boost to this levelling up would be provided by a stock market melt-down to hammer the paper wealth of the 1% who own most of the world’s equities.

But is that likely? The MSM doesn’t think so. Here is just one recent headline from the US: ‘We’re only in 1996: Why the AI boom is still in its earliest days‘. That just about sums up the state of euphoria in AI. Yes, the chip makers are enjoying boom times upstream. But downstream? So far I see little sign of massive profits flowing to AI developers.

And on Friday, I tweeted: Has the S%P just topped? I may get my answer next week. Oh, and the ratio of the US stock market valuation to GDP has just reached an ATH at 2x. What could possibly go wrong?