Y’wanna Buy the PetroYuan!? (FXI,USO,MSFT,FB,XLK)
If we’re on the cusp of a new bull market in commodities, as we here at The Modern Bull believe, then the winners and losers will be clear cut and big.
But when it comes to measuring the impact of rising energy, metals and foodstuffs prices, it’s very hard to determine how China will be affected.
The reasons for this are manifold, and not least because that country is among the least transparent when it comes to all things economic – and, of course, because free markets don’t operate there as they do in many other parts of the developed world.
China is among the world’s largest producers of farm produce – much of which ends up supplying domestic demand, though a great deal, too, is exported. At the same time, it’s the globe’s biggest importer of oil and gas, as well as many metals.
So what’s the net effect on a country like China when, say, oil prices jack up sharply, as they have in the past few months?
To put it in its most general terms, China’s markets and wealth are very closely correlated to global commodity prices, something that cannot be said for a country like the United States, whose econ0my is far more diversified.
But what that means going forward is anyone’s guess, not only because the Chinese economy is among the world’s fastest developing and increasingly more innovative, but also because there are levers available to policymakers in that country that are not available to us here in the modern west.
And so we’re left wondering, as we look at the following chart of the iShares China Big Caps (NYSE:FXI), whither China…?
To begin, the chart shows two discrete and competing technical formations, one that leads higher, and the other lower.
To wit –
- Three fan-lines lower from the late January top (in red) appear to be presaging an end to the bearish action of the last three months. Once price jumps above that level, the bulls should be in control.
- On the other hand, a seven month Head and Shoulders top (insert) has traced itself out, with the neckline emerging at FXI 45 (in blue). That level is also the point of near term support for shares, having bounced higher at least three times after approaching or touching the line (black line).
- RSI and MACD are flat-lining below their respective waterlines, making them a difficult read at this juncture, though they’re patently not positive (in green).
As mentioned earlier, all of this is coming to a head against a backdrop of climbing commodities, and the question we have to ponder is whether the bullish scenario is about to play out for Chinese equities – a development that would have a salutary effect in the short term on our own stock market – or if the commodity rise (particularly in crude oil) has gotten a bit long in the tooth, and we’re about to see a consolidation.
Should the latter be the case, the odds of Shanghai’s blue chips pulling lower become more likely. And in the absence of PBOC intervention, it’s quite possible we could see FXI decline to the $36 range, the downside count for the H&S pattern.
This week’s trade is based on the above conundrum, but before we get to it, we have two other initiatives to examine.
Look Back With Joy!
To begin, we’re closing down our XLK/FB trade from March 20th. The letter was called Spies and Spycraft, and in it we recommended buying the XLK September 21st 72 PUT for $5.55 and selling the FB September 21st 150 PUT for $5.70. Total credit on the affair was $0.15.
As we wrote at the time –
“Yesterday’s action… has the look of a ‘key reversal’ day… If it holds, we’ll get a bounce that opens the stock for a final run at its former highs and beyond.”
You gotta go back and check out the letter, folks. It’s an absolute Mona Lisa.
And wouldn’t you know it, at the end of last week, FB shares jumped on nothing more than a good old fashioned ‘buy the dip’ opportunity, climbing 8% in a single trading session and gapping wildly in the process.
Today our FB PUT trades for $3.50 and the XLKs go for $6.45. Buy back the former and sell the latter and you net $3.10 on zilch laid out. That’s a walloping 1967% in six weeks!
Next up is our trade from last week in which we urged you to buy the MSFT January 18th 95 CALL for $8.60 and sell the MSFT January 18th 95 PUT for $7.80, for a total debit of $0.80.
Again the prophetic ones, we wrote –
“This week’s trade is a direct call on an imminent break higher for the tech sector. It comes amid 1) an unprecedented and exceedingly depressed state among our youth and young adult investing population, 2) a penchant for the worst interpretation of the facts by the mainstream financial press and 3) a tech sector itself which is loaded for bull.”
And so it came to pass.
The MSFT CALLs today trade for $8.45 and the PUTs for $6.78. Sell off the former and buy back the latter and you pocket $1.67 on a debit of $0.80. That’s a one week return of 109%.
And that beats being downwind from a herd of overfed camels.
We’re going to bet on a China breakpoint arriving should crude trade much higher than here. It’s a move predicated on China’s massive need for imported energy, her recent launch of the petroyuan (which will put upward pressure on the currency – bad for Chinese exports), and the likelihood of continued discipline from OPEC and other major suppliers.
And it goes like this –- Content protected for Normandy Executive Lounge, Wall Street Elite, Executive Lounge members only]
Wall Street Elite recommends you consider the purchase of the USO January 18th 11 CALL for $3.05 and the concurrent sale of the FXI January 18th 47 CALL for $3.00. Total debit on the trade is $0.05.- Content protected for Normandy Executive Lounge, Wall Street Elite, Executive Lounge members only]
Note: the long USO options are 20% in-the-money, while the FXIs are slightly out-of-the-money!
With kind regards,
Hugh L. O’Haynew