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While a lot of attention has been rightfully given to the US market of late, the tape half a world away in China’s Shanghai stock market deserves equal, if not more, scrutiny. As you can see from the chart below, China was among the very first equity markets to hit firm ground late in 2008. Similar to other emerging markets it was already well on its way carving out higher highs in March when the US stock market finally stopped going lower.
Exactly at the bottom (on November 2008) I wrote: Time to Consider Chinese Stocks. And throughout the ensuing rally I continued to be bullish as we received confirmation after confirmation from various indicators: the golden cross (when the 50 day moving average moved above the 200 day moving average), the Coppock Guide (for Shanghai) providing the all clear for a new bull move, price trading above its long term trend, etc. You can find a more complete run down here going back to 2007: Nailing The Chinese Market’s Gyrations.
I mention this to illustrate that I’ve attempted to be agnostic. And that has allowed me to be rather lucky in recognizing major inflection points on either side for the past few years. Right now though I’m finding it difficult to continue cheering for the bullish side in China.
On the technical side, the Shanghai market has just fallen out of a fairly large triangle congestion pattern (see above chart). You don’t want to see that happen (as a bull). But it is even more dire when price happens to trip, fall and then bonk its head on the 200 day moving average as it has right now in China.
While the S&P 500 is still about 9% above its 200 day moving average, the Shanghai composite fell just under its long term trend. We haven’t seen prices below this important demarcation point since March 2009 - more than a year ago. And we know that historically, it is more profitable to be on the bullish side when prices are above their 200 day moving average than when they are under it.
There was a comparable technical pattern back in 2007. The Shanghai composite had formed a triangle. The 200 day moving average was sloping up as prices fell under it. The only difference was that then, unlike now, the 50 day moving average was in a steep downtrend. In any case, I can’t help but have serious doubts here.
The other argument, based on more fundamental rationales is that the Chinese economy is a hollow shell gilded to look beautiful on the outside. While the infamous Jim Chanos has been cited on various media recently about his various bearish pronouncements we’ve already heard the same thesis from another very competent authority, Andy Xie, the former Morgan Stanley economist.
Xie, now an independent economist and commentator, was one of the few who foresaw the US credit crunch (as well as the Japanese bubble in the 1980’s). So it is difficult to not listen to him even when he uses bombastic language, like calling the Chinese economy a “ponzi scheme”. By the way, Xie writes a blog here. Would any Chinese speaking readers care to translate and give us a gist of what he is currently saying?
So we have two very smart guys who are saying the same thing. Of course, even if they are right, timing this final consequence in the stock market is still extremely challenging. Here is Jim Chanos talking recently with CNBC about China and how he is positioning his fund:
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