China Punishes FXP Holders

Last Thursday, we highlighted FXI as our Trade of the Day for Bespoke Premium subscribers. The China ETF had made a series of higher lows and just broke above its 50-day moving average at $26.40. Please click the thumbnail below to view the report [pdf file].

After today's market action, FXI hit our target price of $30 on the trade. As shown in the chart below, FXI has now broken solidly above its 50-day moving average and looks great from a technical perspective.

But we thought we would also point out the action in FXP, which is the 2x inverse ETF of the same index that FXI tracks. As shown in the second chart below, FXP has taken investors on a wild ride in recent weeks. After peaking at just above $183 on an intraday basis in late October, FXP closed today at $36.23 -- down 80% from its high! It hasn't been hard to be right from the bearish side in this market, but those who bought FXP over the last month and a half have not made out very well.

Comments

[Did U Think...:]

1-2 more weeks and FXP will be a buy again for a nice run to 50 or 60. Anyone who thinks China is out of the woods yet is insane. FXP got pummelled by the Chinese gov't promising monster stimulus. In other words, this is just a gov't induced bear market rally, and we all know they can be fierce. But at some point very soon the gov't intervention news will be priced in and then people will again return to their senses about the 12-24 month dismal prognosis for China.

How much of their vaunted manufacturing machine will remain after the depression? People uprooted their whole lives in search of promised prosperity. They abandoned their family farms and moved to cities to work in factories but are now giving up face (losing face is a big deal in Chinese culture) and moving back out to their family farm where they will probably not easily retake their former position of authority (someone else will likely have filled the vacuum and will be resentful of the returnees). Given all this, how likely will the farmers be to run into the city for more factory jobs the next time the economy starts to boom? There will be mistrust after this debacle, that's for sure. The wages will have to be a lot higher next time around to attract labor and China will thus no longer be hypercompetitive as they were over the past 15 years relative to the rest of the world.

2008 Dec 09 08:01 PM

[Thomas Wagner:]

looks to me like a nice 4th wave counter trend trade, you will note that we have had a very well defined fall over the last year. Im waiting for the 5th wave wash out that should start if we are not able to get and stay above the 50 day mavg. One question, why close the trade now, id run a trailing stop right under the 50 day ???

2008 Dec 09 08:58 PM