Please Note: Blog posts are not selected, edited or screened by Seeking Alpha editors.

A potential reversal of fortune for the Chinese markets

     The SSE just broke above its 50ema and also made a higher high from the recent downtrend which started in April after the government put out additional lending restrictions which targeted the real estate market.  A strong close would potentially mark a bottom because many traders in China are more technically oriented than here in the US where a lot of the institutional money is more concentrated in longer term fundamental investing.  Not surprisingly since it was in part the cause for the downturn, the recent bounce started when indications from the central government suggested they had stepped on the brakes long enough.

     It was in late 2008 that the SSE bottomed and started trending up after the credit crisis hit.  It was not until three months later did the US markets bottom.  From bottom to top, the SSE nearly doubled but has since given up 2/3s of those gains or roughly 1/3 of its value.  The start of the decline was almost exactly a year ago.

     But this is just technically speaking.  Fundamentally China did nothing more than slow modestly even during the depths of the global credit crisis. Many sectors of the Chinese economy were quite hard hit, but the shift towards domestic consumption kept the economy as a whole growing until the world economies slowly recovered.

     However despite this, many Chinese stocks got hard hit nonetheless. There are exceptions, but most smaller cap companies were among the hardest hit and suffered multiple compressing well into the single digit PEs. Larger caps held better with many moving sideways during the downtrend of the past year. Still, in most cases multiples are in the teens with many SOEs (state owned enterprises) sporting dividends above 3%.

     In summary, for those who always wanted to add direct China exposure to their portfolio, now might be a good time to start looking.  Since many of the larger and more established companies have already listed on the US exchanges, there's no need to look elsewhere.  In many cases, valuations are quite low relative to longer term potential growth rates.  There is also the added transparency required for US listing, because companies have to follow SEC guidelines.  Many stocks have been cheap for some time now, and many even got cheaper during the recent correction.  With the overall Chinese market showing more positive technical strength, both timing and valuations may be on the side of longs now.

     The same set of investing criteria apply, as usual.  It's best to look at more established companies with strong balance sheets and cash flows.  Look for industry leaders even if absolute valuations aren't as low as second and third tier competition.  For those who are more conservative, SOEs that have dividend yields above 3% might be a good option.  It's always good to get paid while you wait, especially when longer term macro trends are still positive.  Normally smaller cap companies should be lesser weighted simply because they tend to have less resources and competitive positioning.  However, it may not be a bad idea to have a basket of smaller companies who have shown past execution.  One good rule I go by is - the smaller the company, the smaller the percentage in your portfolio it should be.