Declines in Chinese Market Mean Great Opportunity

While markets in the U.S. are showing some buying in recent weeks, the same cannot be said of China, which on Monday saw the benchmark Shanghai Composite Index (SCI) fall to its lowest level in 19 months. After a base formation at around 2,600, the SCI failed to hold. 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, which are currently in a bear market — down about 60% from the high of 6,124 and down over 50% from the close of 5,261 in 2007 — are again facing selling pressure.

The decline in the SCI is far worse compared to the 12% decline 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.

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The chart of the SCI broke below from its previous consolidation channel at between 2,600 and 2,950. The Relative Strength Index (RSI) is declining, as is the Moving Average Convergence/Divergence, so there could be further declines. The key is for the index to break the 50-day moving average at 2,925 on strong volume. We expect trading to remain volatile and cautious given the market uncertainties. With the declines, there are vast opportunities for growth investors in Chinese stocks, especially the small-cap area where I see good risk-to-reward investments.

I firmly believe there will continue to be excellent long-term trading opportunities in Chinese stocks for the aggressive investor looking for growth. In my view, no other country offers such incredible investment opportunities. China is also a neighbor of the world’s second most populous country, India, where there are also excellent growth opportunities. Between the two countries, you have over 2.4 billion people or over a third of the world’s total population. Could you imagine the market as disposable incomes in both countries accelerate upwards? That is why you need to be in China. China and India are trying hard to expand trade. It was a mere $38.7 billion in 2007, but is expected to reach $60.0 billion by 2010 after a recent bilateral pact was signed.