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Signs Point To Slowing Momentum In China, $FXI

|Includes:iShares China Large-Cap ETF (FXI)

Tim Biggam, TradingBlock (February 17, 2012, 3:55 pm CST)

Symbol Analyst Target Price Target Date
FXI 38.00 April 20, 2012

The iShares FTSE China 25 Index Fund (ticker: FXI) seeks results that correspond generally to the price and yield performance, before fees and expenses, of the FTSE China 25 Index. The fund generally invests at least 90% of assets in securities of the underlying index and in depositary receipts representing securities of the underlying index. The index consists of 25 of the largest and most liquid Chinese companies, and is designed to represent the performance of the largest companies in the Chinese equity market that are available to international investors. It is non-diversified.

While US markets have been on a major bull run lately, China has been even hotter, rising 14% YTD. FXI shares appear to be stalling at the 40 level, though, with three failed attempts so far. Today's weak price action in copper also bodes poorly for FXI, as China and copper prices are highly correlated.

China also just raised mining taxes, which is a sign that their easing policy may be ending. Also, expected drops in reserve requirements have not been forthcoming, another sign China may be focusing on inflation more than stimulating growth. Over-construction still looms large, and bad loans are on the rise.

With Europe still facing headwinds, Chinese growth may be tempered going forward. Given the recent rise in share prices, and technical resistance, I look for FXI to trim in a little at these levels, with the FXI moving back towards 38 by April expiration.

Play of the Day

Based on iShares FTSE China 25 Index Fund's (ticker: FXI) current market price of $40.26 and using a target price of $38.00, a target date of April 20, 2012 and $1,000 of investment capital, below are three options strategies (ranked by potential profit) and a comparative stock trade to consider should the price target be achieved at the target date.

Click on the strategy name below to access trade details using TradeBuilder on Powered by TradingBlock's TradeBuilder.

Strategy (click for details) % Return at Target Probability of breaking
even or better
Sell Apr Call Spread +101% 47%
Buy May Put Butterfly +82% 48%
Buy May Call Butterfly +60% 56%
Sell Stock +6% 46%

* Click link to access TradeBuilder details on Must have Instant or Actual account. Subject to change due to changing market conditions. Click here to view risks regarding selling stock short.

DISCLAIMER: This content is provided for educational and informational purposes only. Evaluate any strategy prior to use to understand risk and suitability. TradingBlock does not endorse or warrant any Market Analyst content, service or product. Use this content at your own risk without guarantee or warranty of any kind from TradingBlock. Tim Biggam is a TradingBlock registered representative. He is not compensated by TradingBlock for any market research or analysis services.

Stocks: FXI