Chinese stocks - cash out this week if you have positions and avoid if you don't. Quotes are the majority of the article, but I left out the beginning where he talks about 2015 which is the parallel history to what's happening today in China.
AT THIS RATE CHINESE STOCKS WILL HIT ALL TIME HIGHS IN 3 WEEKS - WHAT'S REALLY HAPPENING THERE? - JustDarioQuote:
The current reaction to the latest stimulus plan has nothing to do with the stimulus itself (A BIG BANK IS ON LIFE SUPPORT, CHINA KNOWS IT AND IS PREPARING TO WITHSTAND THE SHOCK IS THIS BULLISH?), but is clearly being engineered abroad. What makes me think about that? Let's look at the events objectively:
- China announces stimulus to support the economy and to recapitalize banks
- The market doesn't react positively (see the chart below I posted the 18th of September)
- Bloomberg issued a "misleading"news headline claiming brokers can borrow from the PBOC to buy stocks ("China Mulls Stock Stability Fund, Unlocks $113 Billion From PBOC"). This is something Bloomberg already did back in January to ignite the first FOMO rally earlier this year, but everyone forgot about that apparently ("China Weighs Stock Market Rescue Package Backed by $278 Billion").
- Algorithms start the ramp exactly at the moment the Bloomberg headline comes out
- David Tepper goes on CNBC saying he is buying everything in China while in reality he has been holding the same position for 6 months and was underwater (David Tepper's big bet after the Fed rate cut was to buy 'everything' related to China). This ignited the retail FOMO (mainly US-driven).
- Rumors of a Large Hedge fund flooded by margin calls start spreading as the squeeze intensifies (Quant Hedge Funds Trapped in Short Squeeze After China Glitch)
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Today the HSI Volatility Index (the HSI VIX) closed above 40 and no one noticed that in the Twittersphere or MSM world. Yes, the VIX has been rising INTO A RALLY meaning all you are seeing is the result of a massive coordinated action to propel a gamma squeeze of gigantic proportions. A coordinated action that obviously knew some large hedge fund out there built a significant short position likely on Futures and China Stocks ADRs since every single day the rally in Chinese stocks started in US markets, not in China. This translated into Hong Kong and China stock openings with a significant gap higher due to market makers quickly rebalancing their books to reflect the overnight jump in futures and ADR stocks. The activity in instruments like the FXI ETF doesn't leave any doubt about this short puts + long OTM call options activity that you can see in other instruments and single stock China ADRs.
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As I flagged in the title of this article, at this pace Chinese stocks are on their way to hitting all-time highs in 3 weeks. Yes, this can happen, but do you think that such a market move, for the most part, driven by a gamma squeeze that is forcing market makers to keep buying stock on the way up to delta hedge, is sustainable? Furthermore, once the US hedge funds coordinating on this decide it's time to cash out, what do you think is going to happen to those stocks held in market makers' bellies? Of course, they will dump them super fast. That will put the market in a similar situation to 2015 when for weeks stocks could not find a bottom and the lower they went, the more stop losses and margin calls were triggered in a vicious circle that made the crash worse and worse.
Again, kudos to those who jumped into this market move, but if you believe that this will go on for long, I'm afraid both the numbers, the setup, and history are against you. Remember profits are on paper until you cash out, and if you believe you will be able to beat HFT algorithms in terms of speed when the momentum turns, you'd better change your mind quickly.
Long story short - The explosion in China stocks has nothing to do with stimulus announced by PBOC.
A BIG BANK IS ON LIFE SUPPORT, CHINA KNOWS IT AND IS PREPARING TO WITHSTAND THE SHOCK - IS THIS BULLISH? - JustDario. It's all a giant gamma squeeze.
Remember - delta is how much a leveraged position rises with each $ gained in stock price. Gamma is how much the delta rises with each $ gained in stock price. Hiigh gamma is what leads to massive quick moves in stock prices, as it forces each additional $ gain to move faster and faster. Go look at Chinese stocks and the HSI over the last couple of weeks. That is not organic and it is not people all of the suddent getting bullish China. A gamma squeeze is an explosion in stock value from pressure exerted against a significant position that is trapped. Someone was very short Chinese equities. The result over the past weeks is that more people caught on and faded that trade and it has trapped them forcing them to BUY shares to hedge their short position. That means they still have their short position which is SIGNIFICNATLY underwater and a bunch of new long positions at unsustainable prices. There is no winning for the trapped party. When the frenzy ends, it will be freefall as everyone unwinds. And it will likely lead to significant action in all world markets as liquidity starts to get tapped to address it.
