What’s the Shanghai Composite Signaling?

From the low on November 4th , the Shanghai Composite has risen more than 100% hitting 3471 on August 4th. After a -5.8% drop today, the index is now more -17% lower than the peak on August 4th. So what is the Shanghai Composite signaling? Could it be a reflection of the surge in bank lending being reined in?

The chart above tells the story of the explosion in lending as part of the stimulus and the subsequent pullback. There have been a few articles floating around about how a large chunk of that lending surge in 2Q09 went into speculative stock market and property investment. It could be that the market is just having an overdue correction having got ahead of itself, or it is something more significant?

There have been quite a few non-believers in the US market rally since the March lows, me being one of them. Although I increased my equity exposure in March and then again in June. I am still of the belief that this a bear market rally. Many experienced market watchers have pointed out the underwhelming volumes, a lack of leadership and the sharp nature of the move, all hallmarks of a bear market rally.

Comments

[enigmaman]

Follow the leader, China lead the world markets with 100%+ move since 11/08, are we now finding contrary to what Wall Street has indicated that its not all as a result of its strong economic growth, but possibly its very own manufactured asset bubble, since they have been the lead car in this roller coaster market ride I would expect the worlds markets are in for quite a wild ride down

2009 Aug 17 03:42 PM

[Fighting Yoda]

Shanghai has already fallen 17% form its recent peak. All this is again an implosion of yet another bubble in China. Lot of stimulus money was simply invested in the stock market (similar to what happened in the earlier bubble) - now some of it is coming out and also addtional lending is being curtailed. Shanghai should correct a lot lot more.

2009 Aug 17 03:59 PM

[whidbey]

I think I agree on the mechanics of this move.

What I want to know is what motivates the PRC economists: do they hate slower growth in stocks and real estate, or inflation more? Terrible choice but it involves the global markets.

The Chinese have the bucks to push things hard (stimulate again), in the hope of stimulating exports (at lower prices) but the price of some more internal inflation. Of course, the Chinese economists might say no to stimulus and let the economy cool.

Today down 6% on the Shanghai exchange. I think I see another contraction starting but what does it mean?

We do not know.

2009 Aug 17 05:32 PM

[dubrunner]

The elliott wave folks identified that the Shanghai composite was on the cusp of breaking its trendline, which it just did. Even with the index down 17% it has further to go before any rebound. Just look at he BDI, as its still falling. Hang Seng is starting to correct too. I think FXP looks good here for a bit as it is composed of Chinese companies in both indices.

2009 Aug 17 07:30 PM

[Alphameister]

China remains committed to economic growth on the order of 8% and will contnue to provide as much monetary and fiscal stimulus as the government deems necessary to reach that goal. They wanted to cool asset speculation a bit, and presumably are not displeased by the current pullback, but they certainly want Chinese stocks (most of them reasonably priced, in my judgment) to track economic growth to new highs. For investors focused on long-term growth, Chinese stocks remain the place to be. Many of their ADRs offer the best GARP opportunities in worldwide markets.

2009 Aug 18 09:22 AM

[Panther]

believe it or not, there will be another rally. If you have had a hard look at some of the individual stocks' pattern you will know; and there are many of them yet to climb over 6124 levels.

2009 Aug 18 11:22 AM