There was not much cause for celebration on the stock markets today. Unless, that is, you cashed in on a short position.
Global stock indices were down around 2% across the board on Tuesday in response to the release of particularly weak factory data from China. All three major U.S. indices (the Dow Industrials, S&P 500, and the Nasdaq Composite) were about 2.75% lower by 3 pm EST. As the disappointing manufacturing numbers from the world’s second-largest economy reverberates throughout the markets, investors are fleeing equities in favor of safe havens like gold. Spot gold was up $6, or about 0.5%, to $1,141/oz on Tuesday afternoon.
Anxiety over the Chinese slowdown have also taken their toll on crude oil prices. After its strongest 3-day rally in a quarter-century, crude sank 8% on Tuesday as a contraction for the Chinese economy would surely spell weaker energy demand.
Overnight on Tuesday, the Shanghai Composite tumbled nearly 1.25% as concerns over the slowing down of the Chinese economy intensified, both domestically and around the international economic community. Various stock indices for the mainland Chinese markets sank between 3% and 4% into negative territory on Tuesday, while benchmark indices around Asia followed about 1.5% to 3% in the red. In fact, the only benchmark equities index in the region that managed to eke out gains was in Laos, which added 2.08%. The rest of the Asian markets, especially Japan and Hong Kong, actually outpaced Shanghai’s fall.
Markets in China will be closed on Thursday and Friday of this week in observance of “Victory Day,” a celebration of the end of Japanese occupation during World War II. Many have speculated that the Chinese government would have an interest in aggressively intervening in its stock markets in order to keep equities—and the sentiment on the markets—propped up ahead of the nationalistic celebration. In many respects, the faltering of the Chinese economy is seen by citizens as an indictment against the economic platform of the leadership in the Communist Party, especially President Xi Jinping. The state has built up much of its credibility and strength in the eyes of the public through the (attempted) bending of the economy to its will. Some mainland investors have even been indoctrinated by state propaganda to believe that, if the state decides it to be so, the markets can “never” go down.
The “2 pm Trading Strategy”
Speaking of market intervention, the People’s Republic has seemingly abandoned its commitment to moving away from such command economy tactics now that the bear market full Chinese stocks is in full swing. It would appear that the government has intervened to keep share prices afloat on multiple occasions over the last month through large purchases of the shares of major state-owned institutions. The downturn has been precipitous: in just 10 weeks, a staggering 43% of value was wiped out of the benchmark Shanghai Composite index alone. This followed a world-beating 125% rally for the index over the 6 months previous.
The most obvious sign of intervention has been revealed through one of the most proven trading strategies for Chinese investors: Buy at 2 pm. The tactic is as simple as it sounds; apparently, around 2 pm each trading day over the last week, the more exclusive SSE 50 index in mainland China has seen significant, near-vertical rallies at the end of the session, typically beginning around 2 pm (the 14:00 mark on the chart below), in order to bring the index back into positive territory by the market close. There have even been reports for weeks of Chinese traders talking openly about this trend, viewing it not as a questionable pattern but merely as a surefire opportunity for profit-taking.