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China’s Telegraphed Stock Plunge

Last night while the Kansas City Chiefs were coming back against the San Francisco 49ers in Super Bowl 54, our eyes were fixed on two things…

The U.S. stock futures and the opening of the Shanghai Stock Exchange.

The futures market is where people trade contracts that are legal agreements for them to buy or sell something at a specified time in the future, for a predetermined price.

The U.S. stock futures were trading higher in the U.S. before the Shanghai Exchange opened. Once it opened, the futures there immediately plunged almost 10%.

But the U.S. futures didn’t plunge in the U.S. market. In fact, instead of going lower, the U.S. futures began to head higher. That might seem like a real screwy situation to most people.

Here’s what was happening behind the scenes…

Some 28 odd years ago when I began my career as a financial editor, my area of expertise was emerging markets. I was hired as the director of research for all of Agora (a small company at the time) and as the editor of a publication called Taipan Publishing Group.

Back then, if you wanted to buy a company that was based in Malaysia, you had to buy shares on the Malaysian exchange. There were also maybe one or two Chinese stocks, traded in the U.S. at the time.

Things have definitely changed since then…

As of today, hundreds of foreign stocks trade in the U.S. as American depository receipts (ADRs) or as direct listings. For example, e-commerce giant Ali Baba trades in the U.S., China and Hong Kong. So as long as one of those markets is open, investors can buy and sell shares to determine a value.

That being said, U.S. investors weren’t too affected when Chinese markets were closed for days at a time in the past two weeks around the Lunar New Year holiday.

But Chinese investors got hammered when the markets opened in China. On the flip side, U.S. investors saw the same shareholdings move higher.

This is because the Chinese shares were oversold in the U.S. in the days when the Chinese markets were closed and the novel coronavirus was captivating the news cycle.

Then when the Shanghai exchange opened and the markets plunged 10% only to recover being down 8% at the close, investors who had bet on a bigger decline in the U.S. found themselves on the wrong end of the trade. The shares were bidding higher this morning as the news was not as bad as initially feared.

Action Plan: This type of action is important to note going forward. The U.S. markets overreacted compared with the Chinese market’s reality. That overreaction resulted in the opportunity for savvy speculators to take a risk when the markets plunged this past Friday.

In today’s investment world, it’s not only the news that enjoys a 24-hour cycle… The markets are always trading in real-time somewhere! So join me in The War Room where you can trade alongside me in real time!


About

With more than 20 years of experience, Karim has mastered the subtle art of options trading. What we admire about him is his ability to score huge gains while minimizing the massive amount of risk that often comes with options. Beyond his expertise in options trading, he is also the author of the best-selling book Where in the World Should I Invest? He publishes weekly about smart speculation in his latest free e-letter, Trade of the Day.

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