Two Trading Ideas: Go Long Volatility and Short China

Over on our new sister site, we've got a couple of trading ideas you may want to check out:

• With the VIX near 18-month lows, here's a way you can profit from rising volatility
• And Chinese stocks are (still) not looking good - it may be time to punt on a China short

Chinese Stocks "Kiss" 200-Day SMA; More Reasons the Bubble is Bursting

OK I'll admit, it's a stretch for me to sit here in my comfy office chair in Northern California and opine about the future of the Chinese economy...especially since I've been there exactly zero times.

But the internet is a wonderful place, and it's a fun sport anyway, so with that disclosure out of the way, here's a China piece worth reading from yesterday's Daily Reckoning - China: No Shortcut to Greatness, by investment author and portfolio manager Vitaliy Katsenelson.

It seems that China has got economics figured out. But don’t hurry to trade your democracy for an authoritarian system. The Chinese grass is not as green as it appears.

First, one shouldn’t believe all the economic numbers that are put out by the Chinese government. This is the government that magically managed to report 6% to 8% GDP growth in the midst of the financial crisis, when its exports were down more than 25%, tonnage of goods shipped through its railroads was down by double digits, and its electricity consumption was falling like a rock.

Second, China will do anything to grow its economy, as the alternatives will lead to political unrest. A lot of peasants moved to the cities in search of higher-paying jobs during the go-go times. Because China lacks the social safety net of the developed world, unemployed people aren’t just inconvenienced by the loss of their jobs, they starve (this explains the high savings rate in China) and hungry people don’t complain, they riot. Once you look at what’s taking place in the Chinese economy through that lens, the decisions of its leaders start making sense, or at least become understandable.



You can catch the rest of the article here.

Want a foolproof way to know how the Chinese economy is doing, from the comfort of your own living room? That's easy - just pull up a chart of the Shanghai Composite Index!

The Shanghai Composite Index recently slumped below it's 200-day SMA.

Source: Yahoo finance

We previously discussed potential weakness in Chinese stocks, and it looks like this could be bearing fruit. A decisive break below the 200-day moving average would indicate that our boy Vitaliy is on the money!

China Flushes, The Rest of the World Begins its Financial Swirl to the Bottom

Regular readers are aware that we've been watching the Chinese market as a potential leading indicator for US equity markets for some time.

Our astute readers aside, of course, the average financial slob (or pundit, if you will) seems unaware that the Shanghai Composite topped way back in August. When I posted this chart and question about the strength of the Chinese markets just after New Year's, I was greeted with a host of comical comments on Seeking Alpha's syndication of the article (which is typical).

"Wait - isn't that a quadruple candlestick, poised for a jump to the upside?!"

To be honest - I had no clue. And still don't. But I can see that China has still not taken out its October highs.

With that, I was pleased (and not surprised) today to see that The Daily Reckoning is also on the beat of China as a leading indicator. Eric Fry writes:

Taking a slightly longer time frame into consideration, the Dow is zero for the last eight trading days…and not very far from zero for 2010. Most European markets are in negative territory for the New Year, as is the Chinese stock market.

So what gives? Do these disappointing performances point to a bad moon on the rise? Is the great big rally that ignited last March about to extinguish itself?

“Probably,” is the answer provided by Jay Shartsis, Director of Options Trading at R. F. Lafferty in New York.

Jay begins his bearish analysis by pointing out that the world-leading Chinese stock market is now leading to the downside. “The important emerging markets of China , Russia and Brazil have topped out already and have been trending lower,” he observes. “They have leading tendencies to our market, having bottomed out before ours did last March. The chart below shows that Chinese stocks (as represented by FXI, an ETF that holds Chinese stocks) [have] traced out a head and shoulder top, and is now rolling over to the downside.”

With China breaking down, global markets may not be far behind.

Ed. note: If you're not a regular reader of the Daily Reckoning, I'd highly recommend you peruse their site here.

Also, regular DR and Agora readers may enjoy a review we posted a few months ago of Financial Reckoning Day Fallout.

Crude Oil Breaks Out, But Still a Big Fat Non-Confirmation - Where's China?

Crude oil has broken through the $80 mark once again - trading as high as $82 - before settling back in after hours trading due to "concerns about the US economic recovery." Not even joking about that one.

Crude's on the loose!

(Source: Barchart.com)

Meanwhile the Chinese equity markets - the poster child of the global economic recovery - continue to languish, unable to decide if they have the energy to break through to new highs, or merely are destined to break down once again:

China's rolling? Not so fast, my friend!

(Source: Yahoo Finance)

A few weeks ago, I pointed out these charts as major non-confirmations of the US indices recent highs. Though crude has broken through, I'm going to stick with the hypothesis as long as China languishes.

After thinking about it - crude rallied well into the summer of 2008, while the equity markets were breaking down. Crude was a lagging indicator then, so it's possible that it'll be the last to roll over this time around.

China, though, was among the first to roll over last time. And it looks like it may be doing the same once again.

If China is turning down, look out below - it could be a long way down.