A Trend That’s Ripe to Reverse

Hey There Income Hunters,

As we hit the back half of August and head into the Q3 close, there are a number of impactful trend changes taking shape …

These changes will be impacted by:

      • Washington’s concern over cybersecurity issues
      • Our government’s desire to bring back manufacturing to the US 
      • Normalization of diverging bond vs. stock volatility trends
      • Risk-off signals dictated by a rise in high-yield bonds 

All of these issues will affect the markets in the coming weeks, and today I’ll reveal a trade that I see as a very strong play based on these factors.

I’ll also take a closer look at these and several other issues during the members-only Trading Legion weekly look ahead event this morning at 11 a.m. Learn more about Option Pit’s top mentoring program here.

Trade the Greatest Tech Divergence in History

China’s tightening regulatory measures have shifted investor psychology to one of extreme negativity towards Chinese tech stocks.

However, it’s important to not misinterpret China’s intentions.

China’s communist state runs a capitalist economic system, and the state intends to serve the interest of its people.

Policymakers will not be swayed by mega-rich capitalist’s like Jack Ma or anyone else, period.

Yes, it’s unfortunate that Chinese policymakers are not more transparent about decisions that impact global markets.

That said, the trend over the last 40 years has clearly been toward developing a market economy with accessible capital markets … 

Take the two most recent regulatory moves :

      1. Policymakers signaled to DiDi (Ticker: DIDI) that it would not be best to go ahead with listing and that the government wants to deal with data privacy issues. 
      2. In the case of the tutoring companies, officials want to reduce educational inequality. They also want to mitigate the financial burden on those who are desperate to educate their children but who can’t afford to pay for the services.

China Tech Is Extremely Cheap vs US 

While Chinese Tech has been hammered, US tech has soared, creating the widest valuation disparity in history.

Check out the chart below …

Year-to-date KraneShares CSI China Internet ETF (KWEB) is down 37%, while 

Invesco QQQ Trust Series 1 (Ticker: QQQ) is up 17%.

I see three forces that will reverse this trend in the months ahead …

      1. The Fed, the administration and the media continue to hide the fact that inflation is a serious threat. I expect continued high inflation, and once this is realized, interest rates will rise, hurting Big Tech valuations which will cause QQQ to correct.
      2. China is expected to ease financial conditions in the months ahead. In fact, 30-year interest rates have dropped significantly, which raises the valuations on Chinese Big Tech companies. With the Beijing
        Winter Olympics only six months away, policymakers will want the economy humming and tech to shine.
      3. The Biden administration is looking to address Big Tech security issues and this will lead to tighter regulations. President Biden also wants to bring manufacturing home to the US, which could hurt tech companies generating decent revenues in China.

Let’s take a look at the price, volume and volatility conditions of KWEB …

On July 27, KWEB bottomed just under $46 before rallying 14% to $52. Since then, it has been trading off on lower volatility and lower volume …

The lower volatility and volume on this recent downtrade indicates a bottom could be established. So …

      • I am looking to purchase the 49/52 call spread for $1 to a Sept. 10, 2021 expiration.
      • I am also considering a paired long put spread on QQQ and a call spread on KWEB, and think both trades can be profitable based on how wide the divergence has gone this year.

The timing is right.

Bring It Home

Uncertainty surrounding the Delta variant and legislation related to the debt ceiling and government spending bills are a potential negative for stocks and commodities in the short run.

With the VIX at the low end of its recent trend, now is an opportune time to hedge equity and commodity positions via a long VIX strategy …

We’ll dive into what that looks like — and much more — during today’s members-only Trading Legion Weekly Look Ahead at 11 a.m. Join us!

Until Then,

Live and Trade With Passion My Friends,

Griff

 

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