Global Alpha Sector Strategy’s intra-Chinese equity sector pair trade hit the 20% return mark. We recommend sticking with the trade, but raising the trailing stop.
The Chinese stock market is in freefall, forcing the authorities to scramble daily to stop the hemorrhaging. This backdrop has propelled our long Chinese consumer/short Chinese exporters pair trade much higher in a short time span, taking out our secondary return target of 20%. While relative earnings fundamentals remain intact favoring Chinese consumer-related stocks over Chinese export-dependent equities (please refer to Tuesday’s Special Alert) , we are compelled to raise the trailing stop, as part of our risk management process, to the 13% return mark. Chinese stock market volatility has skyrocketed. And, given heavy exposure to margin trading and the voluntary suspension of trading for nearly half the Chinese stocks, volatility could become even more intense. Importantly, the broad Chinese stock market has been inversely correlated with this pair trade, and the current message is to expect additional gains for relative share prices at least until the Chinese authorities manage to arrest the overall market’s plunge. Bottom Line: Stick with the long Chinese consumer/short Chinese exporters pair trade via the long CHIQ:US/short CHII:US exchange traded funds, but raise the trailing stop to a level of 0.93 near the 13% return mark in order to protect profits. The next target for the trade is at a level of 1.06.
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Anastasios Avgeriou, Managing Editor