There’s Been a Change of Heart

There are many factors that make up a successful trader. Knowing how to cut losses short is probably the most important. Being flexible in your approach to the market and open to all possibilities is also crucial. Exercising such flexibility we believe it is time to change our mind.

Stripping out the behavior of the Shanghai Composite, which we have discussed, and the continued winnowing of leading stocks, which is a cautionary sign, we have been presented with evidence of a market this is simply resilient and resistant to significant correction. The Shanghai Composite has corrected over 20% in the last few weeks but our market suffered only an ugly day on Monday with no follow through since. As we approach today’s session the indices have taken back all of their losses and a number of leading stocks look just fine in their uptrends.

The behavior of BIDU, a leading stock that comes from the leading market index, was our tell for a market correction. Monday BIDU and the market gapped lower. Volume was higher but not extreme. Still, the activity usually signals heavy seas ahead. Yesterday in this space we opined, “BIDU has shown…fortitude, pushing into its gap on some volume. But it needs to close that gap and climb into its previous range. History tells us that is unlikely.” Well, it’s time for the unlikely. BIDU has climbed back into its range and is a buy back right here.

There are several factors at work. One is the leadership of the immature Shanghai Composite. This is a very restricted exchange and is very young. Both factors contribute to outsized volatility. Second is the influence exerted by Asian trading on US exchanges. For years the US dog has almost exclusively wagged the tail that is the world’s other markets. No longer. The US is now as subject to influence from other exchanges as they are on ours. This has created significantly more market “noise” but needs to be accommodated to avoid being shaken out of successful positions. Finally, the US markets have signaled that the “green shoots” paradigm is still very much in favor whatever the Chinese markets might signal.

There will likely be continued “noise.” But stunningly the market trend remains up and you need to reinvest to take advantage of the intact uptrend.