It’s perhaps a dramatic scenario to paint, but if the Shanghai composite were to lose a similar number of points over the next two consecutive days as it has been doing, we could be in bear territory in just the blink of an eye. This just after hitting a new high earlier this week. Luckily to formally be classified as a bear market though, it would have then to be held there for the next two months. But think about it. For an index that has added more than 120% over the past year, losing 20% may be casually regarded as simply a minor correction, simply a profit-taking trim off. Yesterday’s late day sell down, however, was a little more panicky. Around 500 stocks - or roughly 15% of stocks - traded in China’s stock markets closed ‘limit down’, a 10% maximum daily move. In these cases, stocks that were ‘limit down’ closed the day with only sellers on the board. With the excuse coming from a (reportedly) overdue clamp-down on margin lending by local brokers, together with worries over a liquidity drain due to a heavy calendar on the IPO front next week, the selling may just continue for a few days, as the scramble for the exit door intensifies. A game of ‘fastest fingers first’ may just play out as dealers rush to submit orders in the morning, against the expected flow of forced selling from margin calls that have not been topped up. From a mathematical viewpoint, the absolute amount of a 10% draw down is more than a 10% gain. Losing 10% not only feels more painful than the joy of making a 10% profit. The amount is actually more! Worryingly too, because China’s year-long 120+% move up was backend-loaded in nature, a lot of novice traders and investors were seduced by the promise of a quick buck very late into the game, near the current top of the market. The recent explosion in daily volumes and new accounts opening highlights this theory. Sadly, most of these newcomers may not exactly have the fastest fingers to get them safely out. With early indications pointing to a slight uptick in the futures for Chinese equities this morning, betting on a strong rebound may be a little premature as we may first have to negotiate the ‘Friday’ and the ‘end-of-month’ idiosyncrasies’ of stock markets.
IMPORTANT NOTE AND DISCLAIMERS Market Opinions Any opinion(s), news, research, analyses, prices, or other information contained on this website / document is provided as general market commentary and are from publicly available resources or otherwise obtained, and does not constitute investment advice nor does it seek to market, endorse, recommend or promote any investment or financial product. CMC Markets Singapore Pte Ltd. (Reg No./UEN: 200605050E) (“CMC Markets”) will not accept liability for any loss or damage, including without limitation to, any loss of profit, which may arise directly or indirectly from use of or reliance on such information. Accuracy of Information The content is subject to change at any time without notice, and is provided for the sole purpose of assisting traders to make independent investment decisions. CMC Markets has taken reasonable measures to ensure the accuracy of the information, however, does not guarantee its accuracy, and will not accept liability for any loss or damage. CMC offers no financial advisory services in any of the content or vouch for the veracity of any information. Distribution The content of this publication is not intended for distribution, or use by, any person in any country where such distribution or use would be contrary to local law or regulation. None of the services or products referred to or mentioned are available to persons residing in any country where the provision of such services or investments would be contrary to local law or regulation. It is the responsibility of the reader to ascertain the terms of and comply with any local law or regulation to which they are subject. Third Parties CMC Markets may provide you with opportunities to link to, or otherwise use, sites and services offered through or by third-party(ies). Your use of these third-party services is subject to such terms as posted by these third-party(ies). We have no control over any third-party site or service and we are not responsible for any changes to any third-party service or for the contents thereof, including, without limitation, any links that may be contained in or accessible through such third-party service. These links are provided solely as a convenience to you. You will need to make your own independent judgment regarding your interaction with these third-party sites or services. Our inclusion of advertisements for, or links to, a third-party site or service does not constitute an endorsement of any of the representations, products or services listed therein. Important Note Each reader/recipient agrees and acknowledges that: (a) no express undertaking is given and none can be implied as to the accuracy or completeness of this document; (b) this document does not constitute in any way a solicitation nor incentive to sell or buy any Shares, Stock Options and Contracts For Difference (CFDs) and similar and assimilated products; (c) each reader/recipient of this document acknowledges and agrees to the fact that, by its very nature, any investment in Shares, Stock Options, CFDs and similar and assimilated products is characterised by a certain degree of uncertainty; that consequently, any investment of this nature involves risks for which the reader/recipient is solely responsible and liable. It is to be noted that past performance is not necessarily indicative of future results. In this respect, past performance of a financial product do not guarantee any and are not an indication as to future performance; (d) the use and interpretation of this document require financial skill and judgement. Any utilisation whatsoever by the reader/recipient, relating to this document, as well as any decision which the reader/recipient may take regarding a possible purchase or sale of Shares, Stock Options, CFDs and similar and assimilated products, are the sole responsibility and liability of the reader/recipient who acknowledges and agrees to this as a condition precedent to and prior to any access to this document; (e) as a result of the above, all legal liability directly or indirectly arising whatsoever.