Last week in our piece, China Fear is no News, we pointed out that “Getting fearful about China here is a late trade”.
Stock market had already been a dog for weeks and China related indices like the HSI index had reached huge support levels. Max pessimism had been reached and the bounce looked rather tempting.
Since then the HSI has bounced 4% and we saw strong price action today.
Continue watching this space carefully, as it still drives a lot of the aggregate market psychology. First level to the upside is 29000 and then 30000 where we see the 200 day average.
The CSI 300 Index (Shenzhen) put in one of the strongest candles overnight that we have seen in a long time. Don’t expect a new bull trend to take place, but the bounce is violent and probably has more room to the upside.
Watch related assets like and sectors (EEM, Commodities etc) for trade setups.
As the China War Trade panic theme peaked last week, volatility started moving lower. V2X is down 26% from levels we saw last Monday.
Last week we concluded several times:
Buying volatility here outright is a rather late trade, unless you really fear an imminent market collapse or you need to hedge your book desperately.
After all, people tend to get carried away and start pricing risk out of emotions and not rationality. European equity markets risk was priced at almost 20 last week. The V2X is now trading at 14.5. We are soon reaching levels that could be interesting levels to go long premium. After all:
Volatility is a mean reverting asset.
Source: charts by Bloomberg