James Areddy writes Chinese Investors Crunching Numbers Are Glad to See 8s:

… the Chinese investing public’s trust in the predictive power of numbers — rather than fundamentals like business prospects or profit — is one of many reminders of how buying on the Shanghai and Shenzhen stock exchanges looks like gambling.

Brokerages are set up like casinos. Investors drink tea, smoke and chat as they make trades on computers lined up like slot machines. Instead of dropping in coins, they swipe bank cards to pay for shares. In China, individuals, often with little understanding of financial concepts, make up 60% to 80% of trading.

The absence of a free press in China and regulatory constraints on what financial analysts can say publicly leave investors vulnerable to unusual trading theories. They often make do with folksy trading tips such as those now circulating among investors advising people to wear red clothes, which are representative of a “hot” market, and to eat beef to sustain the “bull” run, while avoiding references to “dad,” since the word in Chinese is a homonym for “drop.”

Areddy ends the article by quoting a Chinese investor who says “in the stock market, half your results come from luck.” If you’re picking stocks based on “lucky” ticker symbols then a lot more than half your results come from luck.

UPDATE: The Bespoke guys ran the numbers… interesting post.

Many people have asked me how to get short the Chinese market using maximum leverage and the only products I can think of are these:

• FTSE/Xinhua China 25 Index Futures & Options
• Hang Seng China H - Financials Index Futures
• Hang Seng China Enterprises Index (H-Shares) Index Futures & Options

You can see from the average daily volume numbers (April 2007) that the liquidity is nothing to write home about, except maybe for the H-shares Index Futures (the H - Financials Index Futures just started trading on April 16 - early days).

If you have an account at Interactive Brokers, you should have access to these products. I’m not recommending you take a leveraged short position in any of these markets, just as I don’t recommend standing in front of a loaded freight train going 100 miles per hour.

Anyone have any brighter ideas than these?

Here’s the notice released by the China Securities Regulatory Commission last Friday, May 11. There’s no English translation available, but maybe I’ll update this post later with my version if I have time. A key excerpt:

值得注意的是，随着市场不断活跃，大量缺乏风险意识和风险承担能力的新投资者入市，市场违规行为也有所抬头。针对当前市场情况，立足我国资本市场健康发展的全局，必须继续深入做好投资者教育，进一步强化新形势下的市场监管工作，切实防范市场风险。

“It’s worth noting that with the market’s uninterrupted rise, large numbers of new investors who lack an awareness and understanding of risk are entering the market, and abuses have begun to emerge. In view of current conditions, in order to ensure the healthy development of the nation’s capital market, we must continue to improve investor education and further strengthen our market supervision given the new market conditions to effectively guard against market risk.”

Translation is incredibly hard work and I’m not very good at it, so if any readers have suggestions for improving that excerpt, please leave a comment.

CITIC Securities is one of the major brokerages in China and everyone is keeping a very close eye on it; it’s something of a bellwether. The stock has gone from around 15 last November to around 60 today, as millions of manicurists have opened trading accounts looking to get rich quick.

Some manicurists heard from other manicurist friends over the May Day holiday how easy it is to make big money buying stocks, got jealous of their friends’ effortless success, and came back resolved to get into the action. Thus the gap up to an all-time high on May 8th. The only trouble is an island reversal formed there, trapping these latecomer manicurists.

In today’s trading, price jumped right back up into the May 8th range, but then sold off as some of those latecomer manicurists had second thoughts and wanted to get out at “breakeven.” The trading day is so short (only four hours: 9:30 - 11:30, 13:00 - 15:00) that day trading isn’t practical or even possible since there are no margin accounts in China. No word on how many Chinese have read Jeremy Siegel’s book, Stocks for the Long Run, thus assuring their absolute ruin in the short run.

Will the May 8th high hold and mark a top, or will the manic manicurists push price above and squeal with delight? Tune in tomorrow for another episode of the (Maybe) Getting Rich (Quick) is Glorious.

You can see that trading is active enough now to draw a clean five minute chart — impressive.

Several screens from the Bloomberg:

CITIC Securities does RMB 2.4 billion in turnover today. Note the banks: China Minsheng, ICBC, and China Merchants all have huge turnover.

Click to enlarge

CITIC Securities is the leading index point gainer for the Shanghai Composite today. Also note the Shanghai Composite breadth on this screen: 757 Up, 66 Down, 62 Unch. This is just the information I need (up versus down volume would be even better), but I can’t find historical breadth data on the damn machine.

Click to enlarge

A typical new highs/lows screen these days: 359 new highs, 0 new lows. And check out those 52-week high versus low differences — aren’t you glad markets are efficient? (Yeah, right. ;-) )

Click to enlarge

A reader named Mike (not TraderMike) asked if I knew of anything that would indicate a top in the Chinese market (I think that was Mike’s ultimate question) and I replied that looking at market breadth statistics would be useful. I poked around on the Bloomberg and found no breadth stats for the Chinese stock market, so I decided simply to look at the On Balance Volume (which TraderMike does look at) for the Shenzhen Composite Index (45 minute and daily charts).

On Balance Volume relates volume to price change. It is calculated by adding the bar’s volume to a cumulative total when the security’s price closes up, and subtracting the bar’s volume when the security’s price closes down.

The following formula calculates the On Balance Volume indicator:
( If ( C > Ref( C, -1), 1, If ( C < Ref ( C, -1 ), -1, 0 ) ) * VOLUME ) PREV

Anyway, no surprises here, I see no “divergence” yet as volume follows price up. The thing to watch for is when price makes a higher high and the OBV doesn’t, you need to get worried. In the absence of more sophisticated breadth statistics, this is one thing we can watch.

Interesting bits from this article in the FT, Bourses in China eclipse all of Asia:

“The combined total value of shares traded on the mainland Chinese market on May 9, 2007 was Rmb376.9bn ($49bn). Wednesday’s figure was nearly double Japan’s $26.9bn turnover, and triple the $16.5bn combined trading volume of Australia, Hong Kong, Thailand, Singapore, Malaysia, Korea, India, Taiwan, Indonesia, New Zealand and Vietnam. It was still less than half Tuesday’s $122bn trading volume in the US, but well above London’s $29.4bn on Tuesday.

While the Chinese market is now the world’s second-largest in terms of turnover, it is still less than half the size of Japan’s in terms of market capitalisation, with Shenzhen and Shanghai boasting a combined $2,200bn compared to Japan’s $4,700bn, the UK’s near-$4,000bn and the US’s $16,500bn.”