In one of our ETF country and sector rotation screens the screen keeps flashing "buy China" and it has been telling us this for a long time now. I can no longer find the stomach to buy into China ETFs and closed-end funds simply because the market has gone vertical and I've been through that pain before. Furthermore many of our clients remember it all too well also.
I really wanted to see just how big the bubble is so I did an overlay comparison of the NASDAQ Composite monthly closing prices for the 3 years leading up to the spring 2000 crash versus the monthly data for the last 3 years of the iShares FTSE/Xinhua China 25 Index (NYSEARCA:FXI). I chose the FXI basically because it's widely followed, easily understood, and has now been trading for 3 years.
The resulting linear comparison of the two indices is rather striking and the ascent of the FXI share price is on a nearly identical trajectory to the NASDAQ composite of early 2000. Will the Chinese stock market suffer the same fate as the NASDAQ? I cannot tell but it is clear to me that it will pullback sooner than later and we will all likely feel it no matter which markets we are invested in.
Full disclosure: many of our client account are long in the Nasdaq 100. None our our client accounts hold FXI.
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