China / 2828 HK - last chance for at least a 10%+ move

Backdrop: Huge developed market outperformance in 2019, looking for a rotation into emerging markets set up. Macro stable with trade war issues out the window given presidential election year. China (ie HSCEI as a proxy) is the largest constituent in emerging markets indices.

Valuation: HSCEI 12m forward PE (souce: FactSet) is at 9.9; looks like only Russia, Hungary and Egypt are cheaper markets at 7.2, 9.3 and 8.4. Compare that with S&P @ 18.7, NASDAQ @ 25.6. Very possible HSCEI goes up 30% from here while other indices go sideways.

Medium term read: Huge consolidation since May 2019 with a clean inverted head and shoulders break out in December 2019. Today's pull back marks the last chance to get in after a 2 year downtrend. Initial target @ $123.

Longer term read: From the medium term read implies breaking out of $120 which looks like a huge double bottom formed from the entire of 2019, implying a target @ $140 which is ~ the previous high in January 2018.

Time: Would assume $123 to be hit around the turn of the quarter (end March / early April) with the $140 in Q3.

Conclusion: Absolutely the last chance to get in around $111. The only risk is China / global macro blow up.

Note

On tail risks, in this case the Wuhan virus, the way to think about it is yes there may be some very short term impact (sometimes there's even a trade there). However, we have to understand these short term tail risks are unlikely to have an impact that would swamp a well set up trade.

This is particularly true in the HK / China case. In the grand scheme of things, the impact is low (at this stage). Don't forget, the trade is premised upon a valuation move (rather than say earnings moves) so it's less important. Finally, Hong Kong has had a long history of dealing with these viruses, so from a competency point of view, it's very well managed and therefore even less likely to have significant impact (again, at this stage).

The impact is likely to be simply from a timeline point of view.

Note

There's a pretty clear support / stop at $98. With China A-shares opening up for trading (including stock connect), we should see stabilisation in the next day or two and see if there's any real momentum to break the chart on the downside here.

While the inverse head and shoulders looks invalidated, the strong support at $99 could mean there's a new pattern forming which is worth monitoring.

Was unfortunately wrong on this one so far (and should have specified a clearer stop in my initial idea) but in the short term, looks like the risk reward is pretty even - ie testing the $98 support or heading back to now a possible resistance at about $110.

Note

The Coronavirus continues to wreck this trade. Trade management is straightforward here - stop loss on close below $103 or if you are really stuck, below $99. $103 is probably a much better stop as there is no reason for it to trade below the recent lows unless there's some fundamental breakage in where the world's at.

Question is just where the upside is from here. Would assume it's hitting recent highs where it broke up but we are waiting for the new set up to form so would have to reassess when it plays out.

Remember that the virus is a relatively random event which is likely to cause shorter term distortions in set ups, but should not fundamentally break the trade other than changing time horizons and the like.

jackartistry

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jackartistry