The Latest on the Chinese Market

Previously I discussed the growing auto industry in China, where General Motors Corporation (NYSE/GM) makes its second biggest profits. Yet, Chinese stocks have been struggling in a bear market that is now down 54% from its high of 6,124 and down a whopping 47% from its close of 5,261 in 2007, which is far worse compared to the 15% declines in U.S. stocks. The larger decline in the SCI versus the U.S. indices should not be a surprise given the higher risk-to-reward on the SCI. The key was to take some profits when the SCI was surging in 2007.

The SCI and Chinese stocks continue to trade with more volatility compared to the major U.S. indices such as the DOW, NASDAQ, and S&P 500. The near-term technical picture remains largely bearish, with the SCI failing to find any buying support despite what has developed into an extremely oversold condition. Speculators, who were responsible for driving up the market, appear to have stepped away. Without the liquidity and speculators, any sustained rebound would be difficult.

Chinese stocks are firmly in a bear market in both China- and U.S.- listed stocks. The near-term outlook does not look encouraging due to the failure to find any buying support and establish a market bottom. Without this, the risk of Chinese stock ownership will continue to be high.

The SCI is in a downtrend, with trading well below the 20-day, 50- day, and 200-day moving average (MA). A positive note is that the Relative Strength Index (RSI) appears to be strengthening, while the MACD is flashing a weak buy. The key is for the index to break the 20-day MA at 2,861, but the downtrend is in place with lower lows and lower highs. In our view, it is a wait-and-see scenario to see if buying re-emerges. With the SCI struggling at well below the key moving averages, it remains an uphill battle. For traders and investors, a base needs to form with buyers to re- enter the market.

At this point, it is difficult to discern if the selling is over in China. There continues to be risk factors, including high oil prices and reduced consumer spending in other countries, which results in less demand for Chinese-made goods and hence profit pressures.