I am not sure I can leave this one alone. Investor sentiment regarding Macau Casinos, and the stocks that make up the Shanghai Composite have made for some fascinating comparisons. Both having to do with stereotypes surrounding China’s love of gambling. Comparing a stock to an index of stocks is a bit goofy to be honest as one has massive idiosyncratic risk, while the other is created in order to help dissipate such singular risk. What I find most interesting about the price action of stocks like Wynn Resorts (WYNN) over the last few years is that for a short period between late 2012 and early 2014 investor sentiment became downright exuberant with the stock gaining 1600% from the 2009 trough to its early 2014 high as the country WYNN gets about three quarters of its sales from, China, whose economic growth at that time was slowing fairly dramatically.
Despite the stock’s 8% bounce yesterday on earnings that were not as bad as expected, the stock hovers above key long term technical support at $100:
While $100 may look like a decent long entry, the stock continues to be on shaky technical footing as the break of the uptrend earlier in the year (that has been in place since the lows in 2009) adds some serious fuel to the fire. Put it this way, it needs to hold $100 or it likely overshoots on the downside as it did on the upside. Is their value here? Sure, it could be at $100, or it could be buying the stock up at $125, or down at $75, I have no idea. But this is a stock that disconnected from the major market it is exposed to, China. And should continue to trade a bit unhinged from expected correlations.
As for the Shanghai Comp, you probably don’t need much of a refresher, and I remain steadfast that another test of 3400 is coming. And it won’t be pretty if and when it breaks:
I can’t think of a single time where a massive risk asset, or grouping of risk assets like an equity index, went up in a parabolic manner and it ended well for investors. Obviously it is impossible to call a top in any bubble, but what for nimble traders, or those with deep pockets and lots of conviction, sticking with a trend and fading sharp counter trend moves can be a very profitable endeavor.
And lastly, the chart below of of WYNN vs the Shanghai Comp, both gaining about 200% from their respective five year lows is uncanny, it appears that the WYNN’s stock performance is reflective of Chinese gamblers taking their chips elsewhere, um to a casino called the Shanghai Composite.
The question that bottom fishers of late in mainland Chinese stocks have to ask themselves is, what lies beneath?