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How the Market Works

China Is a Wonderful, Troubling Thing: How the Market Works

Posted by kdadmin on January 8th, 2016.

China Is a Wonderful, Troubling Thing: How the Market Works

China is a wonderful thing. Nay, a beautiful thing. Its lantern festivals can deeply validate the core values of wisdom, nobility, intelligence, strength, prosperity and love. Like this New Year’s Eve launch on Sunset Beach, Florida.

At the same time,the Chinese government’s troubling approach to monetary policy and direct stock market meddling has created a wildly unstable stock market that has spread fear through global economies.

But I love these times of total hysteria, because I see opportunity …

I Mean, What Did I Just Say?

On December 31, 2015, I posted, How to Invest in 2016: Cash is King. In which I said, “Maybe I’ll wait until it (the stock market) gets its next thumping (drops 10%) and then ease a toe back in to capitalize on the spread. Dunno. Seems like a better idea to me.”

And, what has happened? Since December 31, 2015, the stock market is down about5%. In four days. Hallelujah! I mean, unless you were invested in the stock market, then yikes. Sorry. Maybe you need a new advisor. In case you haven’t been reading along, we’ve been in cash and bonds for months. It’s a nice place to be when wreckage abounds …

So What? 4%, That’s What.

In my post, How to Invest in 2016: Cash is King, I indicated that the general consensus among researchers was that the market could do roughly a 10-12% gain over 2016 and 2017 combined, with 4% in 2016 and the rest in 2017. Yeah, yeah, you read that. Well, follow along, IF the market is slated for a gain in 2016, even a small gain, then doesn’t it mean that a 5% drop in four days offers an opportunity to improve your annual return? This is how the market works.

It’s this sort of approach that separates the pros from the amateurs. An amateur would think, “HEY! I can double my expected return, I’m all in!” Whereas a pro would think, “Hey, this could be a good way to pickup an extra spiff on a small portion of my overall portfolio. But then again, the Saudi / Iran thing could derail everything, or China could completely fly off the deep end taking much of the world with it. Maybe, I’ll just put a toe in here.”

China: It Matters But It Doesn’t.

Take a look at the chart below. What do you notice?

China: It matters to global economics but not necessarily to US stock prices

In early 2015, the MCHI(an ETF that tracks the Chinese Index) when up 28%, held it for two months, and then promptly cratered down by 17% from its original start place. In other words, it went down by 45% off its high over a period of two months. What happened to SPY (S&P 500 ETF) during that same period? Nothing even close. In late August when the Chinese market dropped 17% below it’s original starting level, SPY freaked out and dropped over 12% in a week. But, SPY recovered, and MCHI really didn’t.

In the last week, MCHI is down just over 12%, and SPY is down just about5%. While it sucks to see SPY dropping, it’s not purely tracking China. Nor has it been tracking China’s slide since November 1, 2015.

Further, notice how AGG (an ETF covering the broad corporate bond market) has stayed nicely flat, even earning a profit with FAR less risk than the other two? This is why a defensive position can be useful, and why sometimes even Cash Is King.

China: Same Story Different Day

In my August 25, 2015 post, Market Crash: China Market Manipulation, I discuss China’s choice to inject money into their market system, and how their market woes related to other countries. Well, it’s nearly 5 months later, and nothing has changed. In fact, we recovered much better from China’s last melt down than they did.

So, Bears, put THATin your pipe and smoke it. Oh, and add a stronger US economy, a clear plan for Fed rate rising, a strong jobless rate, strong housing numbers and a dropping unemployment rate …

How to Invest in 2016.

Today is the reason that I said, Cash is King. When the stock market takes a major crap, due to sensational news (war, floods, terrorism, epidemics, foreign economic woes, etc.), it can signal an entry point into liquid, but beaten down investments. In this case, stocks. In less than four days the stock market is down about 5%.

Last week I wanted you heavy in cash for two reason:

  1. So you didn’t lose your shirt when the market cratered.
  2. So you had the cash to scoop up bargains when they presented themselves.

If you’re my client, you enjoyed both.

If you’re not, if you’re somebody else’s client and they left you in stocks with some lame “we buy for the long term (because we’re too lazy to follow the short term),” then maybe you need to become my client …


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