China Needs to Chill (FXI,DIA,QQQ,SPY)
We’ve put ‘war’ on the backburner for a stretch of time now – what with the winter olympics and the market falling out of bed and shootings in Florida. But it may be time to return to the military theme now, as, apparently, the powers-that-be have not lost sight of looming martial conflicts for even a minute.
Potentially the biggest news comes from the Chinese-North Korean border, where the world’s largest military has just deployed an additional 300,000 soldiers in preparation for a potential war.
The Chinese themselves have little interest in warring with the North Koreans, but every reason to want to control the territory after a potential conflict with the United States.
It’s noteworthy to point out that this has happened before. During the actual fighting between the North and South in the early 50’s, the Chinese deployed some two million soldiers along the same border to deal with the perceived American threat.
Times change, of course, and the Chinese military is far more advanced than it was 70 years ago, but it appears attitudes have remained steadfastly entrenched.
A Sprint to the Mountains
Many believe the race to secure North Korea’s military hardware – including their nuclear facilities – is what’s at stake, and that any American/South Korean invasion of the North would focus on grabbing those nukes before the Chinese.
For their part, the Chinese have no interest whatever in allowing America to expand her sphere of influence in Asia – and the Russians are in full agreement with them. For that reason alone China has an interest in seizing most, if not all of North Korea.
South Korea, on the other hand, has been a dutiful ally of the U.S. for the full term, and they expect any conflict to result in borders that secure for them all threats of encroachment, military or otherwise, from Beijing.
Newer Theater/Greater Tensions
Unlike the Korean peninsula, in the Middle East the situation is already hot, and the U.S. has openly admitted targeting and eliminating Russian fighters there. But what’s emerging is that a resolution to the war is anything but imminent and is being further complicated by Turkey’s entrance into the theater alongside the U.S., Russia and their proxies.
Many believe that the entire U.S. effort is leading to a more serious conflict with Iran, towards which the Trump administration has taken a more adversarial posture since arriving at the White House.
That, of course, remains to be seen, but however you hang it, the military machine is gathering speed, even on the European continent, where continuing tensions between NATO and Russia have kept the demand for American armaments and soldiery high.
And That Means Sales are Booming!
Before we wrap the war commentary and get to the nuts and bolts of this week’s trade, we have two open initiatives to look at.
The first was recommended back on the 16th of January in a etter called The Lord Giveth… There, we urged you to sell the DIA September 21st 270 CALL for $4.30 and buy the QQQ September 21st 175 CALL for $4.23. Total credit on the trade was $0.07.
And today? The DIA CALL is trading for $5.45, while the QQQ goes for $7.01. Buy back the first and sell the second, and you net $1.63 on nothing spent. Adjusted for minimal commissions offers up a 987% return in just six weeks.
Next up was our bet from a letter called Phoenix Envy, issued on February 13th. The letter recommended you consider selling the SPY March 2nd 260 PUT for $2.87 and buying the SPY March 2nd 250 PUT for $1.52. Total credit on the trade was $1.35.
And today, with just four trading days remaining until expiry, we’re packing up and leaving. The short PUT trades for three cents and the long for a penny. And because the markets remain volatile, we see little reason to prolong the anxiety. Buy back the former and sell the latter and you come home with $1.33 on zilch expended. After commissions that’s a return of 787%.
IN JUST TWO BLEEDIN’ WEEKS!
That’s an annualized return of 19,933%.
We now return to our regularly scheduled war…
With the recent equity panic attack still fresh in investors’ minds, we believe any American move to engage on the Korean peninsula or in Syria in a more meaningful way would be detrimental to stock prices. We further believe that the White House is staunchly opposed to anything that might derail the powerful rally that began with President Trump’s election.
And with high-level trade talks with China about to begin, it’s to that country that we now turn our attention.
We open with a look at the daily chart of the iShares China Large Cap ETF (NYSE:FXI).
The chart shows a Chinese market that got too hot, too fast (in red), before selling off with equal intensity (in black).
Most importantly, however, was the overbought condition (in green) that was triggered by all the buying in mid-January. Once that technical condition was registered, FXI all but guaranteed for itself a sideways to lower slide for the next two to three months.
A look at the weekly chart only confirms the thesis –
Unfortunately for the Shanghai longs, the weekly chart also struck the overbought back in January (in green), putting a virtual lock on the top that was struck at $54 (in red).
Note, too, that the 53/54 level constitutes a multi-year double top, with FXI smacking into overhead resistance at that level back in the summer of 2015.
Finally, we’ve boxed in blue the stock’s mid- to long-term moving averages, which have done precious little over the last five years and which represent strong underlying support for FXI.
It’s toward that level that we expect the Chinese market to meander in the coming months, and that’s precisely how we’re gearing today’s trade.
…Because conflict on the Korean Peninsula could be bad for all actors, but Asian markets will be far worse off than American should temperatures reach a boiling point.- Content protected for Normandy Executive Lounge, Wall Street Elite, Executive Lounge members only]
Wall Street Elite recommends you consider purchasing the FXI January 18th 40 PUT for $1.32 and selling two (2) FXI January 18th 36 PUTs for $0.68 each. Total credit on the trade is $0.04.- Content protected for Normandy Executive Lounge, Wall Street Elite, Executive Lounge members only]
With kind regards,
Hugh L. O’Haynew