Do you have any insights to share regarding reported chaotic futures trading in China. You said markets were likely be volatile going forward but I never imagined this wild ride. As for my personal investments I have consciously sold into recent market rally's while significantly increasing my weighting to cash. I need to maintain a disciplined response to markets otherwise I get stressed.

Eoin Treacy's view

Thank you for a topical question. There is a lot of hot money chasing short-term profits in China. It’s a symptom of a wider problem where there are limited options to invest for yield, a wide spread between the lending and deposit rates and lax to non-existent regulation. The result is that manias tend to occur with uncomfortable regularity. The stock market last year and the commodity markets this year are two examples. 

An important factor in the Chinese commodity markets is the short-term nature of trading. Open interest has increased substantially but the average holding period is only a couple of hours, with most participants going to cash at the end of the trading day. That creates a lot of intraday volatility but it’s questionable whether it affects the direction of the overall market.
Chicken Eggs have been one of the markets where a great deal of speculative interest has appeared but if we look at the chart the increase and subsequent decrease in open interest is not visible.

Of course iron-ore is much more important from an international perspective and has a particular influence on related shares. The price almost doubled between December and late April and it has now unwound the overbought condition relative to the trend mean. In an ideal scenario the region of the trend mean will hold. However it is also possible that following the massive reaction against the prevailing downtrend prices now move into an even more volatile right hand extension phase which could act as a first step above the Type-2 bottom. 

BHP Billiton’s Australian listing jumped 50% between Its January low and it early April peak. It has since given up about half that move and found at least short-term support yesterday in the region of A$17; to hold the almost four-month progression of higher reaction lows. A sustained move below A$16 would be required to question the support building hypothesis.