Putting on the Big Short in China

Nicholas Vardy

Nicholas Vardy has a unique background that has proven his knack for making money in different markets around the world.

It was another negative week in the markets, with the Dow Jones down 2.19%, the S&P 500 falling 2.17% and the NASDAQ tumbling 3.34%. The MCSI Emerging Markets Index pulled back 3.58%.

Your Bull Market Alert portfolio has been 100% in cash. But recall that you have the iShares MSCI Ireland Capped (EIRL) on your watch list.

The carnage in the U.S. markets continues. After dropping almost 400 points on Friday, the Dow Jones Industrial Average is down 8.2% so far this year.

And the situation is even worse elsewhere. Not a single stock market among the 47 global markets I track is up in 2016.

China’s domestic A-shares are faring the worst, down over 18% year to date.

This week’s Bull Market Alert is a bet that the carnage in the Chinese stock market continues.

The Direxion Daily CSI 300 China A Share Bear ETF (CHAD) is an inverse bet on the performance of the CSI 300 Index. In fact, CHAD is the only inverse fund that provides exposure to Chinese A-shares, mainland China stocks traded on the Shanghai and Shenzhen exchanges, which have been at the heart of the recent market volatility.

Despite their recent plunge, reasons to short Chinese stocks abound.

First, China’s economic growth is expected to slow to around 6.9% this year. Although this sounds like a lot, it actually is the slowest pace seen there in 25 years.

Second, the health of China’s real estate market and its “shadow banking” sector are surrounded by questions. China borrowed huge amounts to stimulate its economy, leading to serious overcapacity in everything from factories to luxury apartments. In 2007, on the eve of the global financial crisis, China’s overall debt to gross domestic product (GDP) ratio was 147%. Today, that ratio officially stands at 231%, but is likely much higher.

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Third, valuation of Chinese stocks is still high. The median stock trading on the Shanghai market boasts a price-to-earnings (P/E) ratio of 24. At the tech-heavy Shenzhen market, that number jumps to 33. On the extreme end, apparel group Shanghai Metersbonwe Fashion & Accessories Co. trades at 1,104 times its forecast current-year earnings, while Internet operator Shanghai Ganglian E-Commerce Holdings trades at 2,440 times.

Finally, from a short-term trading standpoint, momentum rules the day. And that momentum is down, down, down….

Sure, the market may bounce at some point, as global markets settle down from their current rambunctious start to 2016.

But I’m betting the chickens of the Chinese bubble have come to roost.

So buy the Direxion Daily CSI 300 China A Share Bear ETF (CHAD) at market tomorrow and place your stop at a wide $38.

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Nicholas Vardy

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