While Greece is in the headlines as it deals with trying to get funding for its massive $270 billion debt, the real problem that could play out the great crash of 2015 resides in China.
There is a massive stock market bubble brewing in China. And before you think about jumping in, be aware that there will likely be more extreme moves to the downside.
Consider that the country’s benchmark Shanghai Composite Index is already down 32% from its peak of 5,166 on June 12. China is currently in a bear market. We talked about this a few weeks back when the index was down 20% and I advised put options or shorts on the Chinese stocks.
Chart courtesy of www.StockCharts.com
Don’t worry if you have not traded the downside, as I sense there will be plenty of opportunities to come.
Why China Will Stage the Great Crash of 2015
The Chinese stock market is simply not sustainable. The fact that the Shanghai Composite surged over 140% in a year while the economy was stalling was a highly questionable red flag of pending problems on the horizon.
The reality is; much of the professional money has left the market. At the same time, the uninformed retail investors in China (of which there are tens of millions) are left holding on and watching their assets vaporize in front of their eyes. It’s sad. But that’s the chance you take when you trade a suspicious market that has been propped up by the Chinese government and stock market regulators through the availability of easy margin finance to anyone and everyone.
There is a pending financial crisis that can spread across the world like a wildfire. This is my concern more so than the situation with Greece.
The Chinese government is trying to avert a crash, but it’s not working. Beijing having ordered the 21 largest financial institutions in China to help prop up the stock market at these levels is worrisome, as well as being a desperate attempt to avoid a crash.
The concern is that a massive crash in China will likely impact the global stock markets.
If you want to sell and cut your losses, it’s not that easy. The stock exchanges have halted any trading in over 1,300 companies. This means you couldn’t sell these stocks even if you wanted to.
The buyers are also jumping ship.
It’s not difficult to figure out that a shortage of buyers in the stock market coupled with an excessive supply of sellers is a recipe for carnage.
And as I said, even if you have zero capital in Chinese stocks, a bursting of the bubble behind the Great Wall will be felt around the world; including the domestic stock markets.
Investors bearish on mainland Chinese stocks could play additional weakness. Or, after a bounce, can do so through the use of Put Options or shorts in the DBX ETF Trust – Deutsche X-trackers Harvest CSI 300 China A-Shares ETF (NYSEArca/ASHR) comprising of the volatile and overhyped A-shares.