The Next Great Asian Bull

I was tinkering with a few charts yesterday and I got to thinking about when China is going to turn around and what should I look for. Now I’m not claiming to know when and even if they will, but I think the only thing stopping them from becoming the next great financial superpower is themselves in the form of product recalls and how they deal with their rising middle class.

Their economy is going to go through bumps and bruises, but I think they’re on the right track with their $586 billion stimulus package. They are investing in low-income housing, rural infrastructure, water, electricity, transportation, the environment and technological innovation, not bailing out worthless banks and poorly run automakers or giving handouts so people can go to the mall and go shopping. This global recession may slow down their recovering, but they will be in great shape to first emerge from the global weakness and the charts will be setting up long before the recovery. Now is the time to start preparing for the next great bull market.

Below is a chart of the Nasdaq bubble and what I want to point out is what the chart looks like after it pops. In almost all bubbles, price returns to where the bubble started, and sometimes even lower just for good measure. Then, just as everybody is clamoring for “end of the world” scenarios, a new bull emerges and climbs a wall of worry for awhile as everybody doubts the rally.

Are you seeing any similarities to the chart above? One aspect of bubble corrections is that they normally take just as long to go down as they did going up, almost forming an isosceles triangle. China’s market was a huge bubble that had to be busted. I also believe that last year was just a warm-up to a large run that the Shanghai will begin soon.

The only thing to do now is wait for confirmation that the bear market is over and it will probably continue for a few more months or even quarters, but I would say that the worst for this index is over and unless you believe that China is going to collapse under its own weight and not become the economic superpower it’s poised to be, just disregard my entire theory.

Here are “Some Positive Signs From Emerging Markets“, from Financial Sense that was posted yesterday:

For the week ending November 5, there were net inflows of $413 million into emerging markets stock funds. This is a significant improvement from the previous week, when there were net redemptions of $1.6 billion. Two weeks ago, the net outflows from emerging markets funds totaled $750 million.

Year to date, the outflows are estimated at $45 billion, nearly 40 percent of the cumulative inflows from 2003 through 2007.

It is worth noting that, even with the bleak results in 2008, the MSCI EM Index has still outperformed the S&P 500 by more than 200 percent since 1998.

Finally, I’d like to direct you to this website: www.Sharptraders.com. It has an incredibly useful section for everything you’ve ever wanted to know about China, but were afraid to ask. From there you’ll be able to create your own watch list of Chinese stocks so when they do start moving you’ll be ahead of the curve.

Comments

[Pipo:]

Jim Rogers has been buying Taiwan and China since mid-october. Those will be the places to be in for the next few years.

www.jimrogers-investme...

2008 Nov 12 06:16 AM

[investor88:]

Now world equity markets are down together but who will lead the pack in the next bull? Todd harrison [of marketwatch.com] says market bottom is 1q2010, he is probably referring to the Anglo Saxon markets.

Let the markets tell us who the leader[s] is, then we can follow. Historically the wealthy Anglo Saxon markets lead the charge out of major recessions, my feeling is that the next time it will be no different but of course I may be wrong.

2008 Nov 12 07:34 AM

[NOWHEREMAN:]

The wealthy Anglo Saxon markets aren't very wealthy anymore are they? They will be even less so over next 9-12 months.

2008 Nov 12 07:38 AM

[M.R. Henderson:]

Try charting the news stories that headline an acceleration in declining imports and exports and retail consumption, along with growing unrest among a population not accustomed to its income contracting, and shorting the Chinese market emerges as the only rational decision at this juncture.

2008 Nov 12 11:14 AM

[ArtfulDodger:]

Good info. Thanks.

2008 Nov 12 11:45 AM

[HaavBline:]

Stories about China that makes headlines in western media tells you very little about China. And even when the news tells you something useful, it usually gets misunderstood and misinterpreted by people who has minimal knowledge about the subject.

2008 Nov 12 09:25 PM

[NOWHEREMAN:]

Agreed HaavB, which is why, I rely on the Singapore news feeds more than western media hype.

2008 Nov 13 02:08 AM

[Jeff Pierce:]

I probably have more knowledge of China than you give me credit for. My 3 step daughters are half chinese, and my middle child just got back from a 2 wk trip to China. Their grandparents travel there so I hear stories, and I have a good friend whose girlfriend just immigrated to Canada from China last year.

2008 Nov 13 02:09 AM

[M.R. Henderson:]

"Western" news coverage of China is fine so long as it does not come from Murdoch, now including the Wall Street Journal. Wait until the October and November numbers are traipsed out to see how much they affect the FXI. Anyway, this article is about charting, not news, and I have a question for the author. According to your charts, why do you find a bottom for the Shanghai at around 1600? Why not a bottoming around 1000?

2008 Nov 13 06:54 AM

[Jeff Pierce:]

M.R.

I don't know that the Chinese markets have bottomed as of this week, but I do think that China is the next great story. For all I know 1000 could be the bottom, but above I state it's time to start looking for good companies and watch for signs of a bottom being put in.

Keep your eye on the Macd and RSI for clues that selling pressure is waning. Then watch for a series of lower lows and higher highs, and your chances of not "catching a falling knife" will be greatly increased. When you start to see Chinese stocks forming solid basis and breaking out will be the time to load the boat.

2008 Nov 13 07:45 PM