The Bull is Back in the China Shop — and Booking 19.51% Gains

U.S. markets had their first negative week in three weeks, with the Dow Jones down 0.15% and the S&P 500 ending the week 0.32% lower. Global markets continued their seasonal out performance, with the MSCI Emerging Markets Index rising 1.38%.

That was good news for last week’s leveraged bet on emerging markets, as ProShares Ultra MSCI Emerging Markets (EET) ended the week 2.71% higher. Your strongest performer was HollyFrontier Corporation (HFC), up 6.78% last week. With U.S. markets so weak, I’m recommending that you sell half of your options here to book 19.51% gains in your March $42.50 call options today.

This week’s Bull Market Alert takes you back into one of the formerly hottest markets of the world — China — through yet another leveraged, short term bet, ProShares Ultra FTSE China 25 (XPP). XPP’s performance corresponds to two times (2x) the daily performance of the FTSE China 25 Index.

China has badly underperformed most global markets this year — including even Greece. But economic data is now breaking bearish sentiment. The Shanghai Composite surged on Friday, recording its largest one-day jump — an incredible 89 points, or 4.3% — since October 2009. Since the Shanghai Composite made a low of around 1950 on Dec. 3, it has jumped roughly 8% in under two weeks.

Here’s why I think the Chinese stock market may have finally found its bottom and will continue to power ahead in the weeks ahead.

On Friday, the China flash factory purchasing managers’ index came in at 50.9, the highest in 14 months and the fifth consecutive monthly gain. Any number above 50 represents expansion. New orders rose to 52.7, also a fifth consecutive monthly rise. This increase in manufacturing output is a leading bullish indicator, and gross domestic product (GDP) growth in Q4 is now likely to top 8%. Electricity output — a more reliable indicator of economic conditions — also rose 7.9% in November from a year earlier, the fastest pace this year.

China’s top leaders met this weekend at the Central Economic Working Conference. Chaired by Li Keqiang, the incoming premier, the conference was a “re-set” of the government’s commitment to Chinese reforms. This comes on top of a recent trip made by China’s new Communist Party chief and future President Xi Jinping to Guangdong Province across the border from Hong Kong — a trip that recalled a 1992 swing through southern China by then-paramount leader Deng Xiaoping to relaunch economic reforms.

China also recently scrapped a ceiling on investments by sovereign wealth funds and central banks in its capital markets in an effort to encourage long-term foreign ownership and to shore up the slumping stock market.

These efforts are having an impact. Goldman Sachs has made Chinese stocks one of the investment firm’s top picks for 2013. Institutional investors are now re-entering the Chinese market after a long absence, and they now are increasing their bets on a Chinese rebound so they don’t miss the boat. You shouldn’t either. So buy ProShares Ultra FTSE China 25 (XPP) at market today, and place your stop at $47.50.

The options on XPP are illiquid. So if you want to place an option bet on China, I recommend the February 2013 $40 call options (FXI130216C00040000) on XPP’s unleveraged (but much more liquid) cousin — iShares FTSE China 25 Index Fund (FXI).

Portfolio Update

Bank of Ireland (IRE) ended the week flat, as bulls and bears butted heads. The overall trend, however, is still up, with Standard & Poor’s also raising several IRE debt issue ratings last Friday. With the Irish recovery continuing to gain traction, IRE is a BUY.

National Bank of Greece SA (NBG) rose 2.81% during the past five trading days. A weekend newspaper article quoted the Greek finance minister saying he expected “more prominent signs of growth and positive rates of change” in mid-2013. Euro zone ministers also said Thursday that the next 34 billion euro bailout payment would roll out this week. NBG is a HOLD.

Michael Kors Holdings Ltd. (KORS) gave back 3.33% last week. Investment bank Goldman Sachs initiated coverage on KORS early last week with a “Buy” rating and a $75 price target. Take note, $75 is an astronomical 50% jump above Friday’s closing price — far above Piper Jaffray’s recent $65.00 price target. KORS is a HOLD.

United States Natural Gas Fund LP (UNG) fell 6.95%. UNG continued to suffer last week after breaking down through a key technical support level. Seasonally warm temperatures are not helping either. However, the 20% correction the January natural gas contract has taken recently is giving traders a bullish itch to buy at this level — which coincidentally occurs right at UNG’s 200-day moving average. UNG is a HOLD.

PowerShares Listed Private Equity (PSP) gained another 1.01% during the past five trading days. PSP ended the week just one cent shy of the $10 level — its 52-week high and September price resistance level. With technical indicators showing PSP somewhat overbought, expect volatility during the next week or two as traders test this important technical level. PSP is a BUY.

Discover Financial Services (DFS) lost 3.91% last week. With DFS set to report earnings on Dec. 20, this recent dip to the 100-day moving average may be an excellent opportunity to pick up some discounted shares. DFS dipped below the 50-day moving average last week and is technically now a HOLD.

HollyFrontier Corp. (HFC) jumped 6.78% to hit a new 52-week high. Shares are up a whopping 94% for 2012, and the outlook remains positive going into 2013. HFC is a BUY.

Apple Inc. (AAPL) lost 4.40% for the week. AAPL ended Friday just $5 away from the key $500 price level. AAPL took a significant bounce from this price just one month ago, and indicators show AAPL greatly oversold at this point. The $500 level is also a major psychological barrier prone to inducing buyers back into action — many of whom have been waiting for year-end profit-takers to finish their selling. Apple’s new foray into the massive China smartphone market also yielded sales of over two million iPhones in just the first week last week. This week could see increased volatility as bulls and bears wrestle for direction. AAPL is a BUY.

HDFC Bank Ltd. (HDB) closed the week down 2.53%. Virtus Emerging Markets Opportunities fund manager Rajiv Jain said in a recent Forbes article that one of his top picks for 2013 was HDB. He highlighted the 26% average earnings per share growth over the past ten years. HDB is a BUY.

ProShares Ultra MSCI Emerging Markets (EET) gained 2.71% in its first week in your portfolio. EET enjoyed further upside this week as the emerging markets bull continued its charge. The time of year, coupled with a very positive news cycle as of late, gives this position good footing for a move higher. EET posted a new 52-week high last week and is a BUY.