Investing Overseas? Time for a Breather

Stock markets in China are hot. The trend is up, driven by speculation and inflows from saving accounts. But there is also risk, as the momentum is overdone and the SCI is near overbought territory. The rapid rise of the SCI this year gives it bubble-like characteristics, as the market there appears overextended.

 The benchmark Shanghai Composite Index (SCI) touched another record when it broke above 6,000 and traded as high as 6,124.04 on October 16. The move from 5,000 to 6,000 took less than two months. In late July, the SCI was trading at only around 4,000 and is up over 30% since. It is up a whopping 250% from its 52-week low of 1,753.49 and up 130% this year.

 The current risk is that speculating is driven higher to a large degree by active speculation by unsophisticated Chinese investors. China has one of the highest savings rate in the world, so there is ample capital on the side waiting to be funneled into stocks. In our view, this is a real concern, as a run to the exits from the masses could result in a major correction. This would ultimately impact stock markets around the world.

 The near-term technical picture and price trend for the SCI are positive, with a strong Relative Strength Index (RSI) and a bullish MACD. The index is holding above its 50-day and 200-day moving averages at 5,132 and 3,818, respectively. Watch for the SCI to hold above the aforementioned moving averages; otherwise, we could see another decline to a lower pivot point at 5,025. The SCI is holding above the Bollinger Bands, which is bullish, but watch for potential volatility, as the Bollinger Bands are wide and suggest possible volatile market swings.

 So, while the gains have been more than impressive, we are concerned about a correction and the bubble-like conditions, which leave Chinese-listed stocks vulnerable to selling. Given the advance of the SCI, investors investing overseas need to step and take a breather.