The excitement that once dominated the news in regards to Chinese stocks has been fading in the recent six months since the benchmark Shanghai Composite Index (SCI) traded at a 52-week high of 6,124 in late October 2007. That was the market top in China and it was characterized by euphoria and speculative buying. Sound familiar? It was a bubble and stocks have been hammered. Since October 2007, the SCI has traded with more volatility compared to the major U.S. indices such as the DOW, NASDAQ and S&P 500.
The SCI was down over 50% from its high to 3,049 at one point, before staging a bullish “V” shape formation on the chart, although it is early to see if the recent rally from the low is sustainable. The SCI is presently hovering at around 3,656, down about 40% from its high and down about 16% to date in 2008, well above the three percent and six percent decline in the DOW and S&P 500, respectively. The lager decline in the SCI versus the U.S. Indices should not be a surprise given the higher risk-to-reward on the SCI. I bet when stocks reverse, Chinese stocks will again outperform.
The chart of the SCI (May 8) is showing a minor rebound. The near-term price trend for the SCI is positive, with a recent break above the 20-day market average (MA) at 3,426, but remains well below the 200-day MA at 4,743. The Relative Strength Index (RSI) is neutral, but the MACD is also flashing a buy signal on the chart. A strong break at the 50-day MA at 3,710 could see the SCI move towards the 200-day MA. But in the absence of major news, this may not happen this year.
With the SCI remaining below the key moving averages, a major correction and trend reversal have occurred. For traders and investors, a base must form for the selling overhang to occur and then for buyers to re-enter the market.
My advice would be to sit tight and wait for the fall-out to show some buying support. You may want to make a list of Chinese stocks that have fallen over 50% to consider when markets show signs of reversing.