4/1 Review Notes

Today, the index keeps moving higher, and that’s also because last night the U.S. saw a strong surge. The markets in Japan and South Korea at today’s open in Asia were also sharply up, so today A-shares have been doing a decent job of following the trend. And there hasn’t been any pullback at the close of trading, so the overall move is still quite good. However, calling it a “good” move has its issues. The problem is that this afternoon, Brent crude oil started to slump significantly during the trading session. The decline was very fast. In the afternoon there wasn’t much in the way of news, and as for what the Iranian president said about wanting to negotiate—he had already said it in the early hours of last night. And today’s intra-day drop in Brent is basically just a matter of positioning and fund competition. But the key issue is that before 15:00, Brent crude had already dropped sharply. At that time, the oil-and-petrochemicals sector in the session was also rapidly retracing, but A-shares didn’t continue the breakout in that momentum. Instead, it got stuck at the gap area above, so the move has been under pressure.

Today, during the session, the intraday high reached 3955—basically just fully filling that small gap from earlier. Unfortunately, when crude oil sold off hard in the afternoon, the index didn’t continue to rally with momentum—that’s the issue. It’s also the point I’m more concerned about, because right now the index is sitting in an awkward position right after filling the gap. Today’s trading volume also hasn’t kept expanding; it’s still maintaining 2wy volume. So today’s index isn’t a “strong rally.” It’s just tracking the external markets, with a short-term pullback continuing. And today’s pullback again got stuck at the gap’s overhead pressure level—that’s a relatively big risk.

Also, as I said earlier: at the current index level around 3900 points, in my personal view, it’s not a good time to aggressively add huge positions, because the war in the external markets is still ongoing, and the negative factors haven’t been resolved yet. What you’re seeing now is just a low-volume consolidation. It’s also a pattern where it recently came back from 4200 down to 3800, then rebounded back up to around 3950. The main volume is still shrinking. In fact, I personally still view the current move as only a rebound during a downtrend, not a reversal. During a sideways-to-down process, you often fall some, then rebound some, and fall again—that’s how it goes. That’s why I think this isn’t a time to go all-in with a heavy position and “do it big.”

Of course, the viewpoints above are for reference only. Why have I been saying “for reference only” lately to save my life? It’s because of this guy with a “yellow hair”—he lies with his mouth every day, causing the market to whipsaw up and down. The second before, there’s a piece of news that’s positive; the next second, his new version turns into negative. So at times like this, it’s very hard for you to fully grasp the market’s direction, because you can’t control what comes out of the yellow-haired guy’s mouth! [Taoguba]

Actually, today the Iranian president’s statements are a bit “dovish.” He wants negotiations. In fact, Iran’s president has always wanted negotiations. I don’t know whether everyone understands Iran’s internal political power structure. Iran’s president is elected by the people and mainly handles political affairs. But Iran also has a boss above the president, which is Iran’s supreme leader. Previously it was Khamenei; he’s dead now, and his son has taken over. And it’s the supreme leader of Iran who is the true boss. Iran’s Revolutionary Guard also truly manages Iran’s military, and they take orders from Iran’s supreme leader rather than from the Iranian president.

In Iran, the president is like the pen—mainly handling economic affairs. And Iran’s economy is indeed not good right now; the currency has already depreciated to almost like “toilet paper.” So for the Iranian president to seek negotiations is normal behavior. After all, he mainly wants to maintain domestic economic stability. But what he says is basically useless. Whether Iran ultimately fights the U.S. or negotiates mainly depends on the decision of Iran’s supreme leader. The words of the Iranian president now don’t carry much weight. Iran’s military also follows the supreme leader’s decisions. And as I mentioned earlier, little Khamenei—he wants to fight. And he has to fight. He needs to win this war in order to truly stand on firm ground and truly secure his position in Iran’s supreme leader role. Even if the U.S. says they won’t fight, he can’t agree to that. He needs victory in war to make his identity and status more solid.

So in reality, the market today is taking the Iranian president’s “negotiations” talk a bit too seriously. But in fact, during this U.S.-Iran war, what the Iranian president says doesn’t represent much. And at 15:00 today, Brent crude oil even briefly broke below 100. As for us, our crude oil futures were even pushed down to the daily limit. I personally think what the Iranian president said is somewhat “blaming crude oil unfairly.” If it were said by Iran’s supreme leader, then that would be the true bearish factor. The Iranian president’s words don’t have a real big impact.

Right now, at this moment, Brent crude has also rebounded back to around 103. And just by looking at the number of ships passing through the Strait of Hormuz over the past two days, you can tell as well: the number of ships passing in 24 hours is still only in the single digits. And only a small part of those ships are actually oil tankers—probably just a few. So for the crude oil situation at present, there is basically no meaningful supply effect. From the actual results, there isn’t any truly substantive negative impact on crude oil.

So for the past month, the entire market’s trend has been driven by news. The main driver is the yellow-haired guy’s mouth. That’s also the reason March is widely recognized as being too hard to trade: you get whipsawed by news, which changes too fast—one day a negative catalyst, and the next turn it becomes a positive catalyst. Haha, it’s difficult to play.

To sum up: I think in the short term, crude oil may still jump around driven by what the yellow-haired guy and others say. But remember this about Iran: we look at one person’s view—that is Iran’s supreme leader, little Khamenei. If he says negotiations, or that the situation has eased, then it’s very likely that things really have eased. And in the middle of it, no matter what the yellow-haired guy says, it only affects short-term price action. In addition, pay more attention to the number of vessels passing through the Strait of Hormuz every day—this is the truly real data. You can see whether it’s good or bad for crude oil: as long as it keeps being shut, shut through late April, even through late May, then no matter what the yellow-haired guy says, it won’t matter for crude oil anymore, because the real supply-demand relationship will have already told everyone the answer.

Actually, with this Middle East war, this year’s bottom range for crude oil prices has already moved higher. Before the war began, Brent crude oil was around 65. Now, according to forecasts and calculations by international investment banks, the impact of this war’s missile bombardment on Middle East oil-producing countries is such that many basic infrastructures are very hard to quickly restore in the short term. That’s also what it means: even if, say, the Strait of Hormuz is unblocked tomorrow morning, crude oil supply won’t quickly recover to the previous level. It still needs time to buffer. So during the war’s back-and-forth missile exchanges, in practice, as it keeps escalating step by step, this lifts the likely minimum price for Brent crude this year. Now, based on data currently provided by international investment banks, the bottom price for Brent crude is around 82. Let’s assume 80. Then at minimum, until the first half of July in 26—well, the lowest price for Brent crude in the first half is 80. That’s a very difficult lower bound to reach.

Even if negotiations happen midway and the Strait of Hormuz opens, a slightly worse outcome would still mean the low price of Brent crude this year is 80. And it would continue to creep higher with the continuation of the war, because Iran has been continuously bombing infrastructure in Saudi Arabia and other oil-producing countries as well. The more those facilities get hit, the higher the low price of Brent crude this year will be. So right now, Brent around 100 has about 20 dollars of downside room. On the upside there are two thresholds: one is the 120 pressure level, the other is 150. And once crude oil can break above 120, that would mean the war situation is expanding. Such a break above 120 might take about 1 month, but going from 120 to 150 could be reached in about 1 week—because the market will only quickly price in an even worse scenario and a higher crude oil premium when the war situation expands.

So for the short term, in my view, as long as the Strait of Hormuz stays closed and both sides keep firing missiles, then looking at a 1-month horizon, the probability that crude oil goes up is definitely greater than the probability it goes down. But this doesn’t exclude unexpected events happening in the middle that cause both sides to really sit at the negotiating table and negotiate—such as if Russia plays a mediator. All of that is possible. Anyway, for reference only.

But for the short-term crude oil trend, it’s already clearly being led around by the yellow-haired guy. And there’s nothing you can do about that.

One more reminder for everyone: Qingming Festival is coming up soon, and the three-day holiday around April 4/5/6 is also coming. But changes in the external markets over these three days are likely to be significant. So I still recommend: if your current position is quite heavy, you can reduce a bit on Friday to avoid volatility from the news over these three days. Because sometimes, doing with an obvious, certain trend is where you have a higher chance of making money. Besides, lately the yellow-haired guy has been sending troops further into the Middle East—deploying aircraft carriers. If on Friday your position is fairly heavy, and then during these three days the U.S. really launches an “island landing” operation, then on Tuesday when you come back, your account will get bombed, haha.

Also, even if you’re holding crude oil, you can reduce some on Friday. Because if during these three days the U.S. keeps being dovish and the yellow-haired guy keeps bluffing about negotiations, then when you come back it could be another daily-limit drop. So whether you’re holding crude oil or non-crude-oil bets—when the market is up and down because of news, you should play with small positions. Save your real ammunition for when the dust has settled, and then load up fully.