US Equities are Benefiting from China

• Posted by Greg Harmon
• on January 11th, 2012

The Chinese Shanghai Composite has been trending lower for a long time and I have been pointing it out to you along the way. Many now believe that it is ready to reverse and start to climb higher again. I for one am not convinced yet. The weekly chart below shows that it is climbing but take a look back along the chart. It has had a couple of stalls and short reversals on this 9 month

Shanghai Composite, $SSEC

down trend in the past in June, August and October. In fact the timing lines illustrate the symmetry of the stalls and fits with the current timing for another. It may reverse eventually and head higher but until it exceeds 2550 you should not be convinced.

But for those of us working and playing in the United States markets there is an even stronger trend with the Chines market that has significance. Below is the ratio chart of the Shanghai Composite against the S&P 500 SPDR, $SPY. It has been in a downward channel for nearly 3 years. It looks technically to be bouncing off of the bottom of the channel but displays many signs that the downtrend will continue. The Relative Strength Index (RSI) has not been above the 60 level since mid 2009 and although rising has a long way to go to get there. The Bollinger bands are

Shanghai Composite, $SSEC vs S&P 500 SPDR, $SPY

opening lower as it falls. The Simple Moving Averages (SMA) are all sloping lower. And the Moving Average Convergence Divergence (MACD) is negative. It is near the full retracement of the move higher but until it reaches that level at 15.59 the trend remains lower. But importantly it signals a continued relative flow of funds from the Chinese Market into the US Market. This is a good thing for the US Market from a Macro perspective. It can also be interpreted as a relative weakness in the Chinese economy. Flows from China into the US whether from a perceived relative safety in the US Market or Strength in the US Market are to our benefit raising US Equity prices. Don’t forget this perspective when viewing the Chinese situation.

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The information in this blog post represents my own opinions and does not contain a recommendation for any particular security or investment. I or my affiliates may hold positions or other interests in securities mentioned in the Blog, please see my Disclaimer page for my full disclaimer.

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