Author Archives: Scalper1
Chinese ADRs: Index Inclusion A Key Catalyst
MSCI will include Chinese ADRs into its indices, a key positive to US-listed Chinese shares. Tech will be the biggest beneficiary with BABA, BIDU and CTRP being the three largest. Short-term trading idea: Long BABA and BIDU. Long-term fundamentals continue to favor BABA over BIDU. MSCI announced the details involving the inclusion of Chinese ADRs to its indices. This is significant in that it marks the first time the ADRs are being included in MSCI indices. Overall, 14 Chinese ADRs will be included through two rounds, with the first starting on November 30th and the second starting on June 1st of 2016. This inclusion is significant in several ways: First, the inclusion into the MSCI indices allows these ADRs to be noticed by large fund managers who can only invest in a particular index, thereby allowing them to benefit from the positive fund flows. Second, the inclusion could potentially pave the way for Chinese domestic A-shares to be included in the index. Large cap Chinese ADRs are the biggest beneficiaries of this decision, so companies such as Alibaba (NYSE: BABA ), Baidu (NASDAQ: BIDU ) and Ctrip (NASDAQ: CTRP ) could see further fund flows into these stocks. Among the three largest ADRs to be included in the indices, I am positive on BABA given its attractive near- to medium-term outlook (see – Alibaba: The Best Remains The Best ) and CTRP given its industry consolidation ( Baidu And Ctrip: Tie-Up On O2O ). I am least positive on BIDU given its weaker position in the fast growing mobile payment and O2O space relative to its rivals ( Baidu: Flying Against The Bears ). Looking at the companies to be included in the MSCI China Index, it is clear that internet is the biggest beneficiary, accounting for 30% of the index. This is the first time in which a private enterprise such as BABA, rather than a state-owned enterprise (SOE), is the largest company. This also shows the transformation of the Chinese economy where private enterprises are becoming increasingly important. On the other hand, the weight of SOEs will drop to 55% from 68%, a record low. Finally, China will account for 28% of the emerging market benchmark, an improvement from 24%. Alibaba is perhaps the biggest beneficiary of this decision, accounting for 40% of the inclusion, followed by BIDU that accounts for 27%. Ctrip, NetEase (NASDAQ: NTES ) and JD.com (NASDAQ: JD ) will account for 5-7% each, but BABA will remain the most relevant with 8% of the MSCI China Index, followed by BIDU at 5%. Together, they will take the 4th and the 8th spots in the MSCI Emerging Market Index. After this inclusion, funds tracking the MSCI Emerging Market Index will be the primary fund flows that drive these ADRs. For BABA, this represents roughly 25 days of its average daily volume, whereas it is 35 days for BIDU. For New Oriental (NYSE: EDU ), it is around 92 days of its trading volume, while TAL Education (NYSE: XRS ) and NetEase could see somewhere around 50 days. Conclusion, the inclusion of Chinese ADRs in the MSCI indices is a positive to most ADRs, particularly the large caps. For my short-term trading idea, I would overweight BABA and BIDU. However, long-term fundamentals continue to favor BABA over BIDU.
Market Lab Report – Volatility Model Update
MDM is designed to catch longer term moves rather than every short-term move. On the other hand, the Volatility Model is designed to catch shorter term moves. It has caught enough moves in extensive back tests and in real-time to put reward way ahead of risk, thus profits have outperformed all other strategies even in a sideways sloppy market as we have seen for much of this year. The success of the results put the model in beta phase on the website. Of course, always remember that past success is no guarantee of future success. The volatility model went to a buy signal on Nov 12 because the risk level was about -2.5% and the potential upside was much larger. Nov 12 marked the seventh day of its pullback, so there was a fair chance the market would find its low and bounce as it has done many times in similar situations this year. Plus the S&P 500 was looking to get support around its 200dma. But selling persisted on Nov 12 as the S&P 500 stayed under its 200dma, so the model went back to cash as its fail-safe was hit for a -2.6% loss using a 1x ETF such as XIV. But then, shortly before the Nov 12 close, the volatility model issued a rare sell signal, but since it is in beta, I decided not to issue another signal when the model had gone to cash just a couple hours prior. The sell signal was a rare, higher risk signal as such a sell signal comes along only 1-3 times a year based on back tests, but carries potentially very high reward. But since this signal was out of the model’s norm, and given that the model had just gone to cash, I decided to keep the model in cash. That said, I’m figuring out how best to provide risk/reward for members that will be conducive to most trading psychologies. But that is a difficult task, so I’m thinking of just issuing ALL signals and let members deal with the sometimes large number of whipsaws as the results in backtests and in real-time overall seem to speak for themselves even with all the whipsaws designed to protect the downside. That said, the issue I sometimes have is taking my own signals, always to my detriment, especially if I’ve been whipsawed. But mistakes are learning opportunities for refinement so I think that will be the best course of action. And as signals are issued, members can see for themselves how all signals should be taken as it is nearly impossible to predict which signals are whipsaws at small losses while other signals have resulted in substantially larger gains.