Going Up & Going Down — Waiting and Watching for Extremes

I think it’s time that serious equity speculators put Chinese stocks on their radar screen. Domestic Chinese equities have been doing terribly this year. Just pull up a 10-year chart on the Shanghai Composite Index and you’ll see the downward price action and volatility.

Chinese equities had two spectacular up years beginning in early 2006 until late 2007. From the low, the index appreciated about sixfold. Then, in 2008, everything came apart. The market gave up almost all of those gains in one year’s time. In 2009, the market came back somewhat, but has now given up most of last year’s progress. Chinese equities continue to prove to the global marketplace that extreme price volatility is now the new normal and that the business cycle can be harsh.

I’m putting domestic Chinese equities on my radar screen because of the poor trading action. It’s possible that Chinese stocks may find a bottom this year.

U.S.-listed Chinese stocks have also been hit by weaker price action. Investor sentiment for these shares has dwindled because of the action in China, but also due to the risk aversion that’s inherent in a bear market. Frankly, there is a lot of good value in these shares right now.

But, when you’re speculating in a secondary market, the whim of the marketplace is the only arbiter of prices. Just because a company is trading for an attractive value on a stock exchange doesn’t mean that you’re going to make any money. The effect is even more pronounced in a bear market. It is, however, worth watching these companies, waiting for the right time to pounce.

A lot of experts have pronounced over the years that you can’t time the market, but this is precisely the most important factor in determining your returns. Timing is virtually everything if you’re in the equity speculation business.

It’s fair to argue that China’s economic growth will be robust over the next 10 years. A well-known Chinese bank is likely to be much larger and more profitable a decade from now due to population growth and expansion. But, this doesn’t mean that now is a good time to invest in such a security.

I like when markets go up and down in big moves over short periods of time. I like waiting and watching for extremes. Currently, Chinese equities are falling, as the economy attempts to correct itself from a long period of overgrowth. If the current trend holds, the Shanghai Composite Index could soon be trading at a key technical level, which is the low it set in late 2008. This to me will be a very interesting level at which to consider going long the Chinese equity market.