All eyes turn to Wall Street

No doubt you've heard the news that the SSE Composite fell 6.5% today triggered by the increase in stamp duty from 0.1 to 0.3%. If you think this was an over reaction you're right. Let's take a look at what a 0.2% increase in stamp duty amounts to. On a trade with a value of 150,000 RMB or approximately 20,000 USD, stamp duty will increase from 150 RMB to 450 RMB or USD $20 to $60. Not exactly shearing away large chunks of wealth.

So what to make of the market's reaction? I believe, and I have absolutely no evidence to back it up, that it demonstrates just how speculative the Chinese market has become. If the stockmarket were full of rational individuals buying stocks on the basis that companies are undervalued (a silly assumption to make in the current market) would a 0.2% increase in transaction costs significantly alter their view of the value of the businesses they are buying?

Here is a quick quiz for you to see if you follow my meaning. If an investor perceives that the price of company ABC's shares are undervalued by 15% and the government raises stamp duty by 0.2%, by how much does the investor think company ABC is undervalued now? If you answered with anything other than 15% and you invest in the stockmarket it might be time to consider putting your money under your pillow.

Following on logically then (warning: applying logic to the stockmarket is fraught with danger) I can only assume that a 6.5% sell-off resulting from a 0.2% rise in stamp duty means many investors aren't investors at all but merely speculators with no idea of value, but hey that's just me.

So all eyes will turn to Wall Street tonight, London is down 1% as I write and NYSE futures are pointing to a lower start. Actually I don't think there will be too much of a sell-off in New York tonight. The real action starts later in the week with US non-farm payroll data to be released.

Beware the double-top
Just a quick glance at a few news sites tonight and a regular theme that keeps getting thrown out is the 'double-top.' From a technical point of view a double-top represents the failure of an index or stock to push through previous highs and continue the upward trend. That's certainly what a few of the major market indicies look like right now, especially the S&P500. Anyway with just 2 trading days left in the month, barring a significant fall May looks likely to chalk up another gain.

I'm going to go out on a limb and make a prediction (I don't often make predictions about market movements because I'm usually wrong) that June will see a pullback in the Aussie market and probably just about everywhere else. Tomorrow I will post some flimsy evidence to support my view. Until then enjoy the action or lack thereof.