Another 1,000%+ winner for Eric Fry’s subscribers… Beijing crushes Chinese tech stocks… risk of U.S. contagion?… the Fed sets up a bond taper
Surprising no one, the Fed made no changes to rates at today’s Federal Open Market Committee (FOMC) meeting.
To be fair, that was never really on the table.
Instead, everyone was watching for clues about how and when the Fed will begin paring its asset purchases.
It was late last year that the Fed indicated it would continue to purchase $120 billion every month in Treasurys and mortgage-backed securities. This was to continue until officials felt they had achieved “substantial further progress” toward their unemployment and inflation goals.
So, where are we today?
From the Wall Street Journal:
The Federal Reserve indicated that the economy has made progress toward the central bank’s employment and inflation goals, and officials offered a hint they could begin to reduce their asset purchases later this year.
The actual FOMC statement said the committee will “continue to assess progress in coming meetings.”
So, what does that mean, and when might such “progress” translate into action from the Fed?
Well, in April, Fed Chairman, Jerome Powell said the Fed was “a long way from” its tapering goals. Last month, he said they were “still a ways off.”
Today, Powell gave us “some way away.”
Here he is on that (vague) timing and what he wants to see:
What would substantial further progress be? I’d say we have some ground to cover on the labor market side.
I think we’re some way away from having had substantial further progress toward the maximum employment goal. I would want to see some strong job numbers.
So, for now, it’s as business as usual. But we believe this sets the stage for more gains from the stock market.
***Speaking of gains, a big congratulations to Eric Fry’s Speculator subscribers for a 10X+ win!
On Monday, they closed their trade on copper mining giant, Freeport-McMoRan (FCX), for a return of greater than 1,400%.
For more than a year, FCX has climbed thanks to surging demand for copper. And given its inherent leverage, Eric’s recommended long-dated call option on FCX has soared, locking in the 14-bagger. I should add that this return comes despite a pullback in the price of both copper and FCX this spring.
Eric remains highly bullish on copper and Freeport. Here he is commenting on the spring pullback, as well as what he expects looking forward:
But these twin sell-offs appear to have been “normal” corrections in an ongoing bull market. The underlying fundamentals for copper remain extremely bullish for the metal’s price.
Eric is so confident in copper and FCX that he’s recommending a new trade. To get those details as a Speculator subscriber, click here.
A final “congrats” to Eric and his Speculator subscribers. This is yet another illustration of why Eric’s nickname around the office is “Mr. 1,000%.”
***Meanwhile, Eric’s decision to avoid a specific section of global markets appears foresighted today
It was nearly one year ago that Eric recommended his Speculator
subscribers make a complete exit from all China-based positions.
This was sharp reversal. After all, Chinese plays had produced some solid returns for subscribers, including the nearly-150% winner from Daqo New Energy… 73% from Baidu… and the 138% gain on a portion of their Vipshop trade.
Despite all that, Eric was seeing red flags. Here’s what he wrote last August:
During the last few weeks, Chinese stocks have become acutely sensitive to headline risk.
With each passing day, new headlines cross the wires about rising hostilities between the United States and China… or about Chinese stocks getting the boot from U.S. stock exchanges… or about the enormous national security risk the Chinese social media app TiKTok poses… or about America branding most of China’s territorial claims in the South China Sea as “unlawful.”
And let’s not forget the ongoing barrage of headlines about Huawei, the powerhouse Chinese telecom company…
Not only do these disturbing headlines never end, but they are becoming more numerous by the day…
The barrage of bad headlines is creating a stiff headwind for Chinese stocks, while also raising the odds of a “Black Swan” event that puts severe downward pressure on them.
Given this heightened risk, Eric recommended a complete exit of all Chinese positions.
***Fast forward to today, where there’s been a massive selloff happening in Chinese stocks in recent days
Behind the sea of losses is the Chinese government’s widening crackdown on its own tech sector. For months now, Beijing has been reining in big tech, citing data security, threat of monopoly, and financial security.
Over the last five trading sessions, the Chinese Hang Seng Tech Index has dropped more than 7%. But that’s nothing compared with the losses suffered by specific companies earlier this week.
From CNN Business:
Meituan closed down 17.7% in Hong Kong on Tuesday, eclipsing Monday’s massive 14% loss — making it the food delivery firm’s worst two days on record. Tech giant Tencent, meanwhile, dropped 9% in Hong Kong, recording its worst day in about a decade…
Tencent’s declines over the past two days, meanwhile, have erased more than $100 billion from its market value.
Today, all the risks Eric identified in 2020 still exist. Yet, as the last few days have shown, the biggest danger of all is Beijing’s own iron-fisted control.
If you’re invested in Chinese stocks, it’s critical that you evaluate your holdings in light of these risks.
***Even if you’re not invested in Chinese stocks, keep your eye on what’s happening
The reason why is simple…
What’s happening there can be a preview of what will happen here.
Earlier this summer, we featured work from our Strategic Trader technical experts, John Jagerson and Wade Hansen, highlighting the relationship between Chinese stocks and U.S. stocks.
From their update back in June:
Most U.S. investors do not realize that the relatively skittish Chinese stock traders represent a good bellwether for U.S. stocks and risk appetite among traders more generally.
Over the last few years, if Chinese stock indexes (we have used the Hang Seng index below) form a series of lower highs while the S&P 500 forms higher highs, a correction or bear market is almost certain to be less than eight weeks away.
As you can see in the following chart, the Hang Seng (red line) has formed this double top divergence pattern with the S&P 500 (green line) before each of the last four major corrections.
Fig. 2 — Hang Seng Index (Red) & S&P 500 Index (Green) Comparison Chart — Chart Source: TradingView
Currently, we can’t argue that a second lower top has been formed on the Hang Seng yet, but it’s close enough that we should watch it very carefully.
So, what’s happened since June?
As you can see below, the S&P has climbed 5%, notching a new all-time-high recently.
Meanwhile, the Hang Seng did, in fact, form that second top that John and Wade feared. The index has fallen 14%.
Now, we’re not calling for U.S. stocks to roll over because of this. As we noted at the top of this Digest, we think stocks are poised to continue climbing. But we’d be foolish not to notice this divergence, recognize the historical significance that John and Wade highlighted, then prepare ourselves mentally for what could be volatility.
After all, the best investor is usually the prepared investor.
We’ll continue to keep you up to speed here in the Digest.
Have a good evening,
Jeff Remsburg
