You might recall a couple weeks back that China’s government unleashed what might be its biggest-ever stimulus programs.
Estimated at 7.5 trillion yuan (or just over $1 trillion), it covers everything from interest-rate cuts to prop up the dire real-estate market… to stock-market liquidity… to debt issuance… to straight-up alms for the poor.
Investors took note and proceeded to bid up Chinese stocks to their highest level in more than two years. The iShares China Large Cap ETF (FXI) is up more than 38% since the start of September, and it’s now beating U.S. stocks for the year.
You don’t even need to look at a chart to realize that’s overbought, but we will anyway.
Indeed, the Relative Strength Index (RSI) on the daily chart of FXI (purple box below) is at nosebleed levels, putting in a recent high of almost 85 out of 100:
Eighty-five is already a high level, and stocks of any kind don’t tend to stay so overbought for long. But we’re also seeing a divergence between the price and the RSI. While FXI has made new highs, the RSI has made a lower high. That’s a big sign of an impending breakdown.
My message for any holders of Chinese stocks is twofold.
Congratulations… time to celebrate.
Turn at least some of that equity into cash, and you’ll be glad you did.
That’s especially true when we look at what’s happened in the past when FXI has gone this overbought.
Specifically, we went back and looked at all the times FXI closed with an RSI above 84, then tracked what happened to the price 21 trading days later.
Turns out, it’s only happened four times in the past. And of those four times, only once was FXI higher 21 days later – from November to December of 2006.
The funny thing, though, is that the gain in 2006 was so large it essentially cancels out all the losses. Twenty-one days after that reading, FXI rose another 16.1%. The three other times when FXI fell, it lost an average of -3.8%.
It’s hardly a huge sample size, but it does show just how extreme the conditions in Chinese stocks are right now. Odds are strong that the next move is lower.
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The shock-and-awe jobs report…
When the Fed “went big” a couple weeks back, some saw it as a sign that all was not well under the hood of the U.S. economy.
Friday’s jobs report laid much of those fears to rest. September non-farm payrolls grew by 254,000 versus expectations of just 150,000. The unemployment rate fell from 4.2% to 4.1%. And wages grew at a monthly rate of 0.4%, against estimates of 0.3%.
This report seemed to shock just about everyone, precisely because the Fed cut so much out of the gate. Those cuts were directly tied to the idea that inflation was done and dusted, and the labor market was now the primary focus. With this jobs report, it seems as if the Fed has little to worry about.
It shuffled the deck in equity markets, too, with one key rate-sensitive sector falling in anticipation of a slower pace of rate cuts. The SPDR Real Estate Sector ETF (XLRE) fell 1.28% at last look, while financials stocks, represented by the SPDR Financials ETF (XLF), were up nearly 1%.
The big picture here is that, while the Fed is likely to cut rates further over time, chances are good it will either go small at the next meeting on November 7 or skip a cut altogether and wait until December.
Politically speaking, a rate cut right after the presidential election would be a bit like throwing gasoline on a bonfire. So, there’s further reason to skip.
But the Fed will still cut rates. Even with a churning U.S. economy that manages to avoid recession entirely, the simple fact remains that the interest expense on the federal debt is still double what it was just four years ago. And the annual rate of growth on that interest expense, while down from last year’s highs, is still running at more than 20%:
So, booming economy or not, this is the real impetus for rate cuts coming out of the Fed. Add to that that deficits are likely to grow no matter who becomes president next, and we can confidently forecast a lower federal funds rate by this time next year.
Any sectors set to benefit from lower rates are a buy – that’s early-stage tech, small caps, and especially quality yielding equities like real estate and staples.
And as we’ve shown before, the inevitable crush in the risk-free rate is just as big an incentive to get invested. Savvy, wealthy investors are already starting to see the rates fall in money markets, and that means big moves to spend and buy yielding equities are coming next.
The latest Big Money buys are here…
To kick off each week in TradeSmith Daily, I like sharing the below watchlist from one of our talented analysts, Jason Bodner.
Because his algorithm watches specific patterns in buy volume, Jason can get a good idea of where these major funds are placing their bets. Then, by filtering out every stock that’s not high-quality and trading with positive momentum, he whittles down that long list into his weekly hotlist. Jason also includes a Bottom 5 along with his Top 10 stocks according to his proprietary Quantum Score.
Here’s last week’s list (subscribers will receive the freshest names later today):
Five out of the top 10 Hotlist stocks this week are software companies – really six if you count healthcare software company Doximity (DOCS). This speaks to the growing appetite for tech in a lower-rate world.
We’re also seeing biopharma companies creeping up to the top – for the first time in a while, if memory serves. That’s yet another symptom of easier-money policy: Drug companies tend to rely on borrowing in addition to public investment to fund their research.
Not all biopharmas are created equal, though. Down at the worst-ranked stocks on the list for Big Money investment is former Wall Street biopharma darling Intellia (NTLA) and Arrowhead Pharma (ARWR). Those are the two worst-ranked stocks on Jason’s system.
This list is always a great source of timely growth stock ideas and comes along with Jason’s weekly commentary for Quantum Edge Pro subscribers. Here’s a snippet that should show you both how Jason’s system works, and how supportive the Big Money is about the current rally:
How do my algorithms identify those buy and sell signals? Simply put, every stock my system tracks each day has an expected “bubble,” which is based on average price range (volatility), volume, and direction. Trading outside this bubble is “unusual.”
When stocks trade within their normal price range but on bigger-than-average volume, they get an amber bar in my system (see below). This is an effective broad measure of money flows.
Source: MAPsignals.com
When a stock breaks outside its bubble on bigger-than-average volume, we add colors to distinguish buying from selling. A breakout higher gets a green bar; a break down lower a red bar. I can see it for each stock, and my system totals buys and sells for each trading day. Here’s what the past year looks like…
Source: MAPsignals.com
I then smooth those signals out over a 25-day moving average, and the result is the BMI number. That number is the percentage of all signals that are buys.
For example, the BMI today is 74.2. That means 74.2% of signals over the 25-day average are green – or buys. It has trended higher since in mid-July, which tells us money has been flowing into stocks in a big way. The BMI is the amber line below.
Source: MAPsignals.com
You can also see that stocks – as measured by the SPDR S&P 500 ETF Trust (SPY), the blue line – have climbed back to fresh all-time highs. Big Money started preparing for rate cuts, and the weight of high interest rates officially started to lift with the Federal Reserve’s sweeping cut on Sept. 18.
The start of lower-rate eras are a great time to buy growth stocks, and thus it’s a great time to follow Jason’s research. Learn more about how to do that here.
It’ll be a week to remember for self-driving car technology…
Have you signed up for our free briefing on how to invest through all the “robotaxi” buzz? That event starts in less than two hours, so be sure to RSVP now and get ready to hear from Luke Lango on the topic.
Keep in mind that Elon Musk is planning to reveal Tesla’s Robotaxi this week.
And if you’ve kept up with Luke Lango’s research, you know that self-driving tech is already spreading rapidly. Self-driving Jaguar I-PACEs from Google’s Waymo division are taking over the ride-sharing industry in Phoenix, Los Angeles, and of course San Francisco – with Atlanta and Austin next on their list.
You can expect Elon’s announcement will serve as a massive catalyst, speeding the development of self-driving cars dramatically.
Maybe that excites you. Maybe it terrifies you. Or maybe you’re still skeptical.
Either way, you cannot afford to be in the dark on this topic.
