Overnight markets are markedly higher after an inexplicable jump in the US, sending stocks higher by around 1% and up towards 1.5% on the futures-implied markets after-hours. Again, stand ready to short the overvalued S&P500 given how poor of an understanding of mathematics the investing public normally has. Expect Taiwan markets to rebound fairly strongly on the bounce of Apple (so much for sound economic fundamentals) and Hong Kong is fairly likely to keep chugging higher as well given that there is a high likelihood of continued flows into the Hong Kong Dollar.
The yen market was mostly visible in the Euro trade, but otherwise quite a few traders likely got burned on high-convexity bonds or high-theta options expecting the yen to fall versus the trade weighted basket. My recommendation is still (of course) to short it but being slightly less aggressive about it: you have roughly three months after the end of the year, at least, to collect 5% on the USD/JPY pair with 75% probability, and a 15% chance of having the trade run for considerably longer.
Hong Kong Volatility:
Looking closer at the short-term picture, there are now some fairly interesting mechanisms in play pretty much everywhere. Important highs are being tangented around the investment spectrum, and there are a few interesting things to note in the details of yesterday’s Hang Seng Volatility Index performance, which could have longer-term implications for the rest of the HSI.
First, it was along time since we had a +4% move here, and we have to go back nearly three weeks for it. Both the monthly stochastics and RSI values are thus coming around 47% indicating that the ever elusive 50% is in reach. Will this spark a push higher or a strong rejection? Today’s market action will be very important to divine this!
On top of that, we get a break of the monthly SMA, although with a marginal reaction to the upside. We have yet to make a new significant high (we need +16% for that) but the DMI has gone strongly for the two-week upside indication since yesterday. To enforce the downside case, the longer term MACD trend seems to be firmly in place for continued lower moves, so an intraday ping of 16% and the quarterly SMA before turning below 15.6 could be in the cards for today, summing it all up. If anything to go by, the VIX action over in the US surely implies this with a 3.9% fall overnight!
Wider discussion of volatility:
Looking at this fairly important level to determine whether we will actually enter a sustained bull market for the HSI, it makes sense that traders are willing to rotate out of higher-beta positions and move towards 1 on this measure. Given that there is now a more viable two-way market – bulls riding on the wave of cash flowing in and bears fighting backed by the stops around the 22 500 to 23 000 level – there is more importance of entering two-way winning bets such as straddles or married puts.
Expect the future of the HSI to be slightly more “gappy” and fast paced compared to its fairly docile intraday movements so far, and while any ping above 17.5 would indicate enough uncertainty that taking money off the table and entering deep OTM puts would be a good idea, I believe that the range up before that is mixed and largely dependent on volume and the nature of the market moves, where strong bullish sentiment would be benefiting from slightly higher volatility.
Yesterday’s Candlestick Insights and Volume:
Yesterday was a good inside candle, which had some great features. First of all, it closed above the 22 500 level, which is psychologically important. Secondly, it did it in a manner that closed it above Thursday’s open or Wednesday’s close at the highs. Third, we have a wick rejection to the downside, indicating that bulls are comfortable holding the hang Seng above the 22 500 and this not just being the result of random selling. Fourth, volume was good but not spectacular coming off the HK$72 billion Friday action. this is still too low to convince me that we will give the stops a scare, but three to four more days at the HK$60-70 billion interval, or any one day above HK$80 billion should do the trick.
The recent overall increase in volumes could bode extremely well for the market, and the fundamental reason for continued inflows into Hong Kong remains high. To top it all off, the Chinese markets have been going extremely well lately as they have kept running after the Friday 5% jump!
All in all, it could be a very good week, and I am looking forwards to hitting 23 000 before switching tacks and looking for downside plays.