investors using chinese stock market intervention to exit long positions 918812015

Trapped retail investors look for release

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By :  ,  Financial Analyst

One indication of the fever that captured Chinese stock exchanges is that stocks more than doubled in the six months that ended May. That froth fizzled in June, when Chinese stocks crashed 30 per cent, true to the adage ‘the faster they rise, the harder they fall.’

But the real question is whether investors that were a part of the boom cleared their positions, particularly loss-making ones, during the bust.

By stock market principles, traders and investors should cut their losses and run if a position turns against them. That way they preserve capital and live to fight another day.

Unfortunately, retail Chinese investors, the main perpetrators of the margin-fuelled bull market frenzy, appear to be stubbornly holding onto their investments, confident that better times will return and allow them to bail. In other words, faith and hope prevail, rather than trading practicality.

Clearly, these investors are trapped, nursing losses that they lack the will to recognise and cut. There is a rather expressive Chinese term for it: “Tao lao,” or, “captured by a lasso.”

According to a Reuters article, though the Chinese government is relentlessly intervening in the markets to limit the fallout of the crash on the economy, and even has a semi-official recovery “target” of 4,500, in reality it is only providing an escape route to its ‘tao-lao’-ed retail investors-turned-speculators.

That could explain the crash on Monday, when the whiff of a rumour of a suspension of intervention is said to have triggered an 8.5 per cent crash in the Shanghai Composite Index. Trapped, over-leveraged retail speculators likely pressed the sell button while the going was good.

There is one sombre statistic in the Reuters article: An estimated 10 million Chinese investors opened new accounts since April.

That would mean that they invested their savings, or worse, margin debt, around the time the market was reaching its top in May.

That also shows that true to style, they followed their “herd” mentality into stock market poverty.

What was it someone said? Retail investors are like lemmings, reaching for death as they rush to buy high and sell low.

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