Paul Harper's  Instablog

Normally at this time of year, bears are getting their stores in & looking at hibernation, but the recent market has turned that around, with bears dozing most of the summer & now waking up & looking hungry.

Followers of our Twitter account, will know that we have been taking a good look at China over the past 10 trading days & have a very bearish outlook on China going into the 3rd Quarter & by default on the S&P 500. Signals have been coming for a while with the BDI declining at an alarming rate from it’s June highs, flagging up the possibility that China’s economy & associated infrastructure drive are starting to run out of steam.

Having looked at three well traded ETFs , we are placing a trade that is mixing it up a little, SDS :Ultra Short S&P 500, FXI :iShares FTSE/Xinhua China 25 Index & FXP ProShares UltraSh FTSE/Xinhua China 25. The following chart shows the last 5 trading days of SPY, FXI & FXP. As can be seen, there was a clear signal on Tuesday last, that there was a divergence in FXI / FXP, with the S&P 500 mainly trading sideways.



Now using the Morgan Stanley A Fund CAF as a sentiment monitor for the Shanghai market over the same period against SPY (NYSE: SPY), it would seem that there has been some pretty good correlation over the last 6 months of trading. For me CAF is one of the best tickers to use for real sentiment, as it trades in China A Shares, whilst FXI (NYSE: FXI) is predicated on 25 stocks traded on the Hong Kong market (mostly ADRs). From looking at the charts, it would appear that CAF (NYSE: CAF) actually front runs FXI by a two to three day period & this has helped me immensely in trading Chinese ADRs this summer. At the same time, SPY has followed the FXI trend reasonably faithfully for the last 3 months, until August 17th, when FXI began to dip.

So our feeling is that with China declining at such a rapid rate, Long FXP  (NYSE: FXP) short FXI is a no brainer & we are looking to make some good returns over the next few weeks, we are also adding in a soupcon of SDS for interest & to confirm our bearish sentiment on the S&P 500. With a ratio of 2:1:1 we feel that this is a well hedged play, with a good upside potential.

We are looking to hold this trade for a minimum 10 day period & I have set this trade up on kaChing.com in our test account in order to track it. The idea being that we can give a visual on the performance of the trade & also  a good term of reference when we close out the positions & reblog.

At time of writing, no position in any stock mentioned