China Related Stocks Face Possible Pullback After Strong Run

China's Shanghai Composite is next at +44.6% although that gain is not as significant as it might appear because the Shanghai market is largely closed to foreigners. Much more impressive is the 21.5% upward move in May by Hong Kong's Hang Seng Index, which is now ahead 26.3% for 2009.

The strong move in China-related stocks has been great news for readers who followed my advice when he recommended buying two China exchange-traded funds in February. The iShares FTSE/Xinhua China 25 Index Fund (NYSE: FXI), which was priced at $26.81 at the time, closed Friday at $37.37 for a gain of 39.4% in three and a half months. The iShares MSCI Hong Kong Index Fund (NYSE: EWH), which was recommended at $9.74, has done even better. It closed Friday at $14.18 for a gain to date of 45.6%.

Although the long-term prospects for China are excellent, we could see a pullback after this strong run so we suggest taking part profits in both these ETFs now.

Comments

[Danny Furman:]

I agree regarding FXI, but EWH is fundamentally stronger and trades at less of a premium. Hong Kong is the strongest bull out there and still valued at a huge discount to its neighbors. I was expecting a pullback last week and agree with your sentiments from a technical standpoint, but there is still lots of money on the sidelines and FXI is cheap and growing.

PS. I don't own either ETF, but about a third of my stock portfolio is individual companies from the two aforementioned countries.

Jun 01 08:18 AM

[Danny Furman:]

.....meant EWH is cheap and growing

Jun 01 08:22 AM

[Alphameister:]

Like Danny, I chose the individual stock approach and two-thirds of my portfolio is invested in China and Hong Kong. I am up more than 100% from the lows. The big dilemma is what to do when you expect a near-term market pullback and hold stocks trading 30% to 50% or more above technical support levels that would be fundamentally cheap at twice their current prices. I have been doing some trimming and hedging with inverse ETFs.

Jun 01 10:09 AM

[Mad Hedge F...:]

Any pull backs will be short term only. Investors which took my New Year advice to load up on emerging markets are now facing the vexing problem of what to do with all of their new found wealth ( www.madhedgefundtrader... ). The emerging market ETF has soared by 57% to $33, and two of my favorites, the China ETF and India ETF’s, have doubled from their bottoms. The average emerging stock market is now up 50% on the year. The good news is that I believe this is just the down payment on a multiyear, tenfold move for many of these markets. The bad news is that all of these markets are way overbought on a short term and technical basis, and that we have to expect pullbacks this summer that could give up as much as half of the recent move. If you are a trader, take the money and run. If you are a long term investor, no pain no gain. I don’t think any of these high growth plays are going to revisit the 2008 lows. Those were once in a century bottoms. This is the only long equity exposure you should have for the next decade.

Jun 01 10:37 AM

[RiskReturnO...:]

As long as FXI trades above 200 day MA, it's still in bullish trend.

Notice that the 50 day MA just crossed the 200 day MA on INCREASING volume. Very bullish for long term investors of FXI.

Any short-term pullback to $35 would be excellent entry point for those who have not participated in the big rally up!!

(Keep in mind that China economy is bigger now than when FXI traded at $70 -- $210 pre-split; so you are buying it at 50% discount to the peak valuation)

Jun 01 03:12 PM

[Glenn Rogers:]

I agree any pullback is likely to be short term. If we do get a chance to buy lower I would load up again.


On Jun 01 10:37 AM Mad Hedge Fund Trader wrote:

> Any pull backs will be short term only. Investors which took my New
> Year advice to load up on emerging markets are now facing the vexing
> problem of what to do with all of their new found wealth ( www.madhedgefundtrader...
> ). The emerging market ETF has soared by 57% to $33, and two of my
> favorites, the China ETF and India ETF’s, have doubled from their
> bottoms. The average emerging stock market is now up 50% on the year.
> The good news is that I believe this is just the down payment on
> a multiyear, tenfold move for many of these markets. The bad news
> is that all of these markets are way overbought on a short term and
> technical basis, and that we have to expect pullbacks this summer
> that could give up as much as half of the recent move. If you are
> a trader, take the money and run. If you are a long term investor,
> no pain no gain. I don’t think any of these high growth plays are
> going to revisit the 2008 lows. Those were once in a century bottoms.
> This is the only long equity exposure you should have for the next
> decade.

Jun 02 09:13 PM