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China Market Money Making Machine Halted

July 26, 2015

 

It’s about the simplest a trading rule can get, buy when the market opens, sell when it closes.

 

Repeat.

 

This was the trading strategy implemented on the Shanghai market, and was a great way to make money. When applied to the Shanghai composite index, this rule generated a 23% return since July 8, compared to an 8% yield on a buy and hold approach. A worthy exercise. 

 

Applying this to individual shares, such as PetroChina Co yields a whopping 43%, versus a buy and hold of 0.5%.

 

The reason for the success of such a rule? Late day rallies due to government intervention, where policy makers are acting to prop up share prices towards the close in order to show investors that the market has stabilised. Therefore high volumes driving up closing prices artificially.

 

The country has now introduced a ban on same-day trading to eliminate gains on manipulating such support activities. Therefore, not an acceptance that artificial manipulation of the market is inappropriate, and creates anomalies, but rather to make a rule to prevent profiting from their actions. Traders can therefore now not buy and sell a share on the same day.

 

Interestingly though, there is no such ban in the China futures market, and the lucrative open to close strategy remains on those instruments.

 

This begs the question of firstly, whether such a strategy would work on the JSE, which should not be the case, as we do not have similar market interventions by the state, and secondly, whether any other anomalies exist on the JSE that may be available to exploit? We tested the first question, finding that if this buy open sell close strategy was applied from the beginning of January to date on the top 40 JSE shares, you would have made a loss of 15%, versus a loss of 4.5% on a buy and hold strategy. Testing this on an individual government linked share, such as Telkom, yields an even more disappointing 35% loss, versus an 18% loss on a buy and hold strategy.

 

The question however remains that although we don’t have support to closing prices as in the China market, are there not similar anomalies that may occur on the JSE. Futures close outs spring to mind as a period where volumes may be exacerbated, however we found no evidence of material price increases on the STX40 on the two most recent close outs, either on the day, or in the week leading up to the close out.  

 

Perhaps a search for other anomalies is however worthwhile?

 

By Prof Gary Swartz CA(SA) - Institute of Accounting Science

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