7% Rebound in A-Shares, Foreign Buying, Mood Reversal or Both?

Here's a question from the comments:
Any insights into what caused the whipsaw reflation in today's Shanghai market? It was down 2.5% at lunch and then was up just a few minutes afterwards - new easing news released or Chinese plunge protection team stepping in?

When I checked at noon there were ~2300 stocks down on the day and the remaining ~400 up. I cannot imagine that a millions of farmers, within a few minutes, decided that this was now the proper time to buy the dips.
The best explanation, if there is one, is foreign buying through the Shanghai connect.

QQ: 沪指V型反转 70亿沪股通资金入场抄底. Net purchases were almost ¥7 billion (¥13 billion in buys, ¥6 billion in sells).

Foreigners also turned bullish via options on the U.S. traded ETF ASHR: Big Investors Bet on China Despite Recent Losses

Other than that, I didn't see much of an explanation. I checked this article from iFeng 股民晚报:部委重要消息汇总及点评 抄底资金都买了些啥, it is a summary of the day's events for investors. The top story is Xi Jinping talking on the phone with Indonesia's president. This isn't the 新闻联播 (xinwen lianbo); if there was market moving news it would be on top. If you click through and Google translate it, there's some discussion from brokers at the bottom, generally saying the market will rebound and blaming margin worries for the drop.

My personal take:

The major fundamental explanation for last week's drop is the IPO cash lockup. In the past, big lockups have been associated with falling share prices. The smart money buys during lock-up periods and the dumb money is frozen.

Aside from that, I lean towards psychology for an explanation. Last week, there were reports of negative rumors circulating online and regulators felt the need to refute them with an official statement, but rumors are constant background noise. Why those particular rumors caught fire with investors and why the regulators commented, is best explained by shifting mood.

There's been a lot of discussion about margin and stories of people losing everything. The margin issue was always there, but it flared up in the past couple of weeks.

Purely an anecdote, but a friend of mine who asks for stock advice from time to time hasn't talked to me in a few months, but today she messaged me asking for a stock tip, she wants to get back into the market.

Crashes do tend to end with a V-shape bounce. The selling in the AM was people panicking for three days hoping for a chance to sell.

Very few traders are using any type of fundamental valuation and most Chinese stock investors are more properly termed traders. Technical analysis is central on Chinese investment shows. The drop on Friday took the Shanghai Composite almost to the 60-day MA (a widely followed MA). This article (originally published in Shanghai Securities News) is telling investors to watch that line: 关注60日均线支撑作用. The 60-day MA is broken on Tuesday, but then recovered:

Finally, I do believe millions of people can coordinate their action through mass psychology. There are few markets in the world with a greater imbalance between reason and emotion than China's A-share market. Maybe foreign buying was the spark, but at the time no one knew who was buying. They reacted emotionally to a sudden rebound in prices.

No comments:

Post a Comment