Why What Happens in China When You Sleep Matters

• Posted by Greg Harmon
• on January 10th, 2014

The Chinese market is a tale of two markets. The local market is dominated by state owned or state supported companies at the top of the capitalization chain. These make it into the China ETF, $FXI, that you as a non-Chinese person can trade for your China exposure. But the Shanghai Composite, $SSEC, is a much broader index of smaller companies and a better reflection of their total economy. It also has had a very strong correlation with the S&P 500, $SPY, since the March 2009 low. The chart below shows the ratio of the Shanghai Composite to the S&P 500 on a weekly time scale. Notice the long channel running lower since late 2009. The ratio appears to to have a date with a full retracement of the move higher that occurred from 2006 to 2008. That was back when the Chinese were going to take over the world

economy and the Yuan would replace the Dollar as the world’s reserve currency. Hmm. Technically speaking, students of harmonics will notice that it has been tracing a bullish Butterfly which has a Potential Reversal Zone much lower near a ratio of zero. And with a glance at the bottom of the chart to see that the Shanghai Composite remains in a downward trend while the S&P 500 in a upward trend this does not seem unreasonable. A falling Chinese market is good for US Stocks. Check your phone or tablet before you go to bed and right when you wake up if want an quick assessment of the impact.

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