Why Would Anyone Want to Invest in China?
- Posted by Greg Harmon
- on December 5th, 2012
There has been a continual call from mainstream media to look to China as an investment area as it is expected to start to turn its economy around. This week noted technician Tom DeMark made a bold call stating that the Shanghai Composite would bottom since it broke 1960 and would be 50% higher in 9 months. Really? With one extra voice and two months of screaming the same mantra of invest in China, the Shanghai Composite just keeps going lower. Are they not watching? The pundits will point to the iShares FTSE China 25 ETF, $FXI, when they talk about investing in China. But that is not the broad Chinese market but rather an index of state sponsored companies as
explained here last week. But aside from that it has done nothing but drift towards the top of a range as noted in the chart above. A great move if you caught the bottom but now what? And there is a widening disconnect between the FTSE China 25 and the Shanghai Composite that is getting stretched to the extremes. The chart below shows the rising wedge in the ratio chart of FTSE China 25 against the Shanghai Composite. The momentum indicators are suggesting at least a
consolidation if not a pullback is due. Certainly this could resolve with a pop higher in the Shanghai Composite. But isn’t that beside the point? Making a case to invest in China is making a case to take money out of the US markets. The relationship between the Shanghai Composite and the S&P 500 was reviewed last here in late September. Since then nothing has changed. The ratio bounced in the 4 year falling channel, in the chart below, allowing the RSI to reset, for another leg lower in the ratio. And it did move lower. It is now in the disaster zone. Under the red support line near
13.60 there is nothing to show support until the 11.20 area, 17% lower. A move in the Shanghai Composite itself to support at 1825 would only account for half of that move. The rest would have to come from a 8% move higher in the S&P 500 or a continuation lower in the Shanghai Composite. Does it still seem like a good idea to invest in China now?
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Gregory W. Harmon CMT, CFA, has traded in the Securities markets since 1986. He has held senior positions including Head of Global Trading, Head of Product Development, Head of Strategy and Director of Equity. (More)
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