Chinese Economic Growth Slows Sharply In April

Chinese Economic Growth - And The Recovery Rally On Tuesday

Chinese Economic Growth - There wasn’t any major trade news on Tuesday, which some might see as a positive. President Trump tweeted about trade, but he just reiterated previous points. I think the market rallied because it was oversold, not because of his tweets. 

As you can see from the chart below, as of Monday’s close the net percentage of overbought stocks in the S&P 500 was -19.4%. To be clear, a stock is overbought when it is trading more than one standard deviation above its 50 day moving average. Stocks weren’t as oversold as they were in December, but this definitely qualifies as a correction.

On Tuesday, S&P 500 rallied 0.8%, Nasdaq increased 1.14%, and Russell 2000 increased 1.32%. VIX fell 12.12% to 18.06. This pushed the CNN fear and greed index up from 32 to 35. 

Many investors are skeptical of this rally because it can be undone with negative trade news. 

However, I don’t see negative news coming out in the near term because the previously announced tariffs haven’t been implemented yet.

Chinese Economic Growth - It seems like when the stock market rallies, President Trump gets more aggressive on trade. And when the stock market falls, he acts more placid.

Therefore, when stocks fall significantly, President Trump isn’t likely to make statements that hurt sentiment further. To be clear, I am not giving an opinion on whether this makes sense. I’m just commenting on what has happened.

It’s good for the bulls that President Trump cares about how the market interprets trade news.

After the utilities outperformed the stock market on Monday by a large margin, they underperformed on Tuesday as the sector declined 0.87%. Every other sector was up.

The best 2 sectors were technology and energy which increased 1.6% and 1.09%. That’s after tech was by far the worst sector on Monday. The SOXX semiconductor ETF was up 2.3%.

Biggest Tail Risk

Chinese Economic Growth - A tail risk is an event that’s unlikely to occur, but if it does occur, it would cause the market to crater. Fat tail risk is when there is higher chance of a negative event occurring than what’s indicated on a normal distribution curve.

As you can see from the chart below, monetary policy impotence wasn’t as popular of a tail risk in the May Merrill Lynch survey as it was in April. A Chinese slowdown also lost votes in this survey.

Fund managers voting in this poll earlier in May might change their minds now that the April Chinese industrial production report showed 5.4% growth which was down from 8.5% in March. That missed estimates for 6.5% growth.

Furthermore, retail sales growth was 7.2% which was the lowest growth rate since May 2003. That missed estimates for 8.6% and was down from 8.7% in March.

Chinese Economic Growth - Chinese auto sales fell 14.6% 

Chinese Economic Growth - This was the 10th straight month of declines. Fixed asset investment growth in the first 4 months of the year fell from 6.3% to 6.1%, missing estimates for 6.4%. Private fixed investment growth was 5.5% which was down from 6.4%.

Finally, infrastructure investment growth was steady at 4.4%. These numbers were weak across the board. If the survey was taken today, managers would have mentioned a Chinese slowdown far more often in this poll.

As you can see, the lost votes mostly went to a possible trade war. It led the charge, garnering over 35% of the votes. This isn’t a surprise as there has been an increase in tariff threats recently from America and China.

My only issue with this is the concept that a trade war is a low probability event. It’s already happening. The only way you can say this is a low probability event is if the trade war refers to an all-out global trade war.

May Fund Positioning

Chinese Economic Growth - The title of the chart below is interesting because it mentions that fund managers aren’t positioned for a global trade war even though it was listed most often as the biggest tail risk the market faces. The positioning is interesting because investors are overweight cash and underweight equities. 

That would signify a conservative approach. However, investors are also underweight staples and overweight discretionary which is an aggressive approach. Clearly, the concepts of ‘risk off’ and ‘risk on’ don’t work in understanding how managers are positioned.

Chinese Economic Growth - The Most Crowded Trade

As you can see from the chart below, the most crowded trade is long U.S. tech stocks as it got over 35% of the votes. Long U.S. tech wasn’t even mentioned in the survey in April.

That’s interesting because it’s not as if tech had a spectacular April as compared to earlier in the year. For example, from February 1st to March 1st, the tech sector increased 7%. From April 1stto May 1st, the tech sector increased 4.67%. To be clear, that’s an amazing run in April, but it’s not as good as previous months.

Maybe fund managers have become more bearish on the tech sector because of slowing global demand for semiconductors and the trade war.

It’s fair to say that any trade you think is overcrowded, you are also bearish on.

You can be bearish on a stock that has been cratering because you still think the value is lower than the price. 

However, it doesn’t make sense to buy a stock or sector that’s overcrowded. It’s fine to ride momentum, but there’s a clear distinction between prices increasing and an overcrowded trade. Obviously, there is some overlap, but it’s possible to see something rise and claim it’s not yet overcrowded.

Chinese Economic Growth - Conclusion

Obviously, with Tuesday’s rally, the market isn’t as oversold as it was after Monday. The market is still in a correction as investors try to figure out if we’re near a bottom or if there’s more downside. 

If there isn’t trade news in the next few days, the economic data will determine the tape. Weak reports will tell traders that the market might not make a new high soon even if there is a trade deal. Positive news on trade can come from a tweet. It’s a lot tougher to turn a cyclical economy. 

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