Can China's Raging Bull Market Last?

While the debate rages about whether U.S. indices are in a bull market or a bear market, China's stock market continues its relentless climb.

For those wondering what a strong bull market looks like, all one has to do is look at a one year chart of China's Shanghai Class A Exchange.The index seems to go up daily and is something to start watching more closely as a parabolic move higher or a sharp correction lower in Chinese equities could have ripple effects on a potential new up-leg in equities worldwide.

Very Extended Above Its 200 Day Moving Average

In late March, China's Class A Shanghai exchange broke above its 200 day average and has not looked back since. The Class A index is currently very extended, almost 39% above its 200 day moving average. Should this spread between current prices and its 200 day moving average widen further, the odds of a 10% correction may increase considerably.

Should the 3600 level be attained, the Class A index would then be almost 50% above its current 200 day moving average. With its 200 day moving average having just turned higher a few weeks ago and only advancing at a clip of $6 a day, any move to 3600 could be the trigger that could cause a sharp and nasty correction in China's Class A index. Such a correction could cause a temporary setback for U.S. equities and other worldwide exchanges.

How High Will China Authorities Let the Market Go Before Tightening Credit?

With signs that China's housing market may be reaching a boil and with stories abounding about intended stimulus money moving into equities as opposed to the economy, one has to wonder when China's officials will turn off the spigot and start tightening credit. They are walking a very tight line in here. On the one hand, they want the economy to continue to improve while on the other hand they do not want to see inflation get out of control.

This is an important question to consider in here with China's economic growth beginning to expand. While China's officials want their stock market to go higher and their economy to grow at 10%, inflation will most likely remain their biggest consideration and ultimately dictate policy moves later this year.

At What Level Will China's Bull Run Peak?

I find it hard to believe that China's stock market will climb right back into the 6000 levels seen at market peaks a few years ago. Instead, I conjecture that 4000-4200 may be the area where China's stock market could top out either later this year or sometime next year. This price point would represent a 50% retracement area from the drop that the markets had from the top to the bottom. The 50% retracement zone is often an area where snap-back rallies and counter-rallies will fail. This makes 4000-4200 a very important level for the Class A exchange.

There is a lot of long-term resistance at these levels on the multi-year charts, meaning lots of sellers will be waiting in the wings to sell out at breakeven prices. Should this level be hit, I would expect Chinese monetary authorities to begin tightening credit, something which could put an end to what has been a truly impressive bull market run.

With China now such an integral part of the worldwide economy, one actually has to question how good of a thing this big parabolic bull market in China equities actually is with it possibly leading to tighter economic conditions that could ultimately mean a worldwide economy that sees another downswing again next year.

Disclosure: The author does not have a position in any China indices or ETF related securities.

Comments

[capt Brian]

good questions

2009 Jul 19 09:23 AM

[OldLimey]

China bulls need to get a grip. Yes, China is going to be of growing importance going forward. But in the here and now, just consider:

1. Chinese statistics are not universally considered to be reliable.

2. The 'China can lead us anywhere' crew are forgetting the flaw in decoupling theory: China still has far too much industrial capacity targeted at the US consumer. This can change over time, but not in just a few months.

3. The specialist aerospace press reported a few months back on (well-corroborated) comments from the top of a leading Chinese company that had been compelled to borrow the equivalent of $35 billion for which it had no use. Probably not a unique example of the purported 'efficiency' of stimulus allocation.

Just as the US 'Goldilocks economy' only impressed the gullible or folks looking for something to be impressed by, we also need to be suspicious of the news out of China. Supertankers don't turn on a yuan, and anybody who can brush off this truism by pointing to the benefits of central planning under crisis conditions is not old enough to have had initimate experience of communist economies and certainly doesn't know today's China.

2009 Jul 19 01:44 PM

[The Inflection Point]

Thanks for the feedback. They seem to be walking a dangerous line in here. Not sure that will end all that well for them but for now, the bull will most likely only accelerate from here. best, John


On Jul 19 11:51 AM Mad Hedge Fund Trader wrote:

> This is a market tht way overextends to the upside. China’s National
> Bureau of Statistics announced the data for the only country that
> matters right now, showing that Q2 GDP growth came in at 7.9%, much
> better than expected. The Middle Kingdom’s gold and foreign currency
> reserves soared to a new record of $2.13 trillion. The main impetus
> has been the country’s $586 billion stimulus program announced earlier
> this year, which unlike our own, seems to be delivering immediate
> and impressive results. New bank lending in China is through the
> roof, thanks to aggressive government prodding. The China ETF (seekingalpha.com/symbo...)
> had a great week, and is now up 74% from my New Year recommendation
> at www.madhedgefundtrader.... Potentially
> of far greater importance is China’s decision this week to liberalize
> foreign capital outflows, a development that went virtually unreported
> in the Western press. This will make billion of dollars available
> for direct investment in foreign advanced technology and crucial
> natural resources. It also means that less cash will be available
> for investment in US Treasuries, an asset class the Chinese are clearly
> tiring of. For an in depth discussion of this important reform please
> read Keith Fitz-Gerald’s excellent piece at www.moneymorning.com/2.../
> .

2009 Jul 19 06:32 PM

[The Inflection Point]

Thanks for the comments. Good thoughts.


On Jul 19 01:44 PM OldLimey wrote:

> China bulls need to get a grip. Yes, China is going to be of growing
> importance going forward. But in the here and now, just consider:
>
>
> 1. Chinese statistics are not universally considered to be reliable.
>
>
> 2. The 'China can lead us anywhere' crew are forgetting the flaw
> in decoupling theory: China still has far too much industrial capacity
> targeted at the US consumer. This can change over time, but not in
> just a few months.
>
> 3. The specialist aerospace press reported a few months back on (well-corroborated)
> comments from the top of a leading Chinese company that had been
> compelled to borrow the equivalent of $35 billion for which it had
> no use. Probably not a unique example of the purported 'efficiency'
> of stimulus allocation.
>
> Just as the US 'Goldilocks economy' only impressed the gullible or
> folks looking for something to be impressed by, we also need to be
> suspicious of the news out of China. Supertankers don't turn on a
> yuan, and anybody who can brush off this truism by pointing to the
> benefits of central planning under crisis conditions is not old enough
> to have had initimate experience of communist economies and certainly
> doesn't know today's China.

2009 Jul 19 06:33 PM

[Ben Gee]

Before the present Chinese figure of 7.9% growth for Qll, Most economists thought Chinese growth would be about 7.8%. Assuming Chinese figure was wrong and all those economists were wrong, China only grew 7.5% in Qll, does this figure make the Chinese economy any less impressive? People were concern whether the Chinese economy will follow the foot step of the Japanese in the 1980? So what if it does? Is Japan not one of the richest country in the world? Some wonder if the Chinese economy follow the foot steps of the US economy? China will be very pleased if it does. There will always be doubters about China, and they will never be impressed. These people are good for China, China need these people. Without these people, China will be impressed with itself. And that will be the beginning of the end.

2009 Jul 20 06:23 AM