The Precarious Chinese Stock Market Casino: How US Traders Can Play It

Whatever is happening in China right now surely doesn’t bode well for the long term stability of China’s domestic stock market (Shanghai Composite). Retail investors have been piling on the margin debt in order to increase their bets on increasingly parabolic Shanghai equity share prices:

 

Shanghai

And if a massive increase in investor margin financing wasn’t enough to sound the alarm bells, insider selling is outpacing insider buying at a ratio of more than 15-1!

Meanwhile, last week the Shanghai Composite printed a mega bearish engulfing candlestick:

 

China_Volatility

A large full bodied red candlestick of this magnitude within the context of a parabolic advance is an ominous sign. Moreover, volatility has exploded in recent months (see ATR at bottom) as share prices have turned parabolic – yet another characteristic sign of a market in the midst of a topping process.

While another marginal high is certainly not out of the question, there is a very good chance that Shanghai is in the 9th inning of the advance which began last summer. All of this creates an incredibly unstable dynamic in the domestic Chinese stock market which is in stark contrast to a placid US equity market environment (VIX printed below 12 this morning…).

For bored US equity traders two brand new exchange-traded funds (ETFs), CHAU (2x bull) and CHAD (1x bear), could make for interesting trading vehicles as the China equity volatility continues to heat up this summer.