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Is China a leading indicator? Part 2
On August 20, I wrote my first post on this when the Shanghai Composite (SSEC) convincing broke through the multi-month uptrend line. Since then, the index has completed a failed retest of the trend line from the back side and has put in a lower high similar to Jan 08. This is very bearish and confirms the end of the uptrend and signals the start of a downtrend. The 4 week moving average (MA) has crossed below the 10 week MA (these MAs are similar to the popular 20 and 50 day MAs) which is another bearish sign, if you believe in technical analysis.
In the meantime, the AORD is still making new highs, following the US markets. The rally in China’s market started in November 2008, four months before the rally in our markets so if you believe (as I do) that China is a leading indicator, then perhaps our markets will peak in December 09, four months after China’s rally peaked in on August 4, 2009. For those who have a substantial long stock portfolio, it may be a good idea to look into hedging your portfolio soon. We have just released Module 1 of our training videos which is called “How to Protect Your Portfolio in a Falling Market” which is all about hedging stock portfolios. I felt an urgency to complete this module because I saw a lot of people lose a big chunk of their portfolio in the last down wave from Jan 08 – Mar 09 because they were unhedged. Even if you like the stocks you own and believe they will recover in the long term, hedging can help you recover your losses quicker as discussed in the blog post “How to buy safely and profit from your mistakes“.
Despite the general belief that the economy is in recovery, I believe there is more downside ahead of us based on indicators such as what we have just discussed here, and other reasons discussed in other blog posts such as “The case for deflation“. I just bought a book called “The Great Depression Ahead” by Harry Dent on the weekend and am about halfway through reading it. I will share more insights from that book in another post.
Finally I will just provide a short update on my FXP trade which I talked about in my earlier post. FXP is an ETF that inversely tracks 25 major Chinese stocks which is supposed to go up when the stocks go down. I closed this trade for a small loss some time ago when it was clear that FXP was not tracking the SSEC properly. For example, yesterday FXP went down 0.8% even though both the Shanghai Composite and Hang Seng Index dropped more than 2%. If it tracked the index correctly, it should have gone up 4% as it is a double inverse ETF. The main lesson learned for me is that I should have back tested more thoroughly before I put on that trade. So even though I believe the SSEC is on its way down, I cannot trade this as there is no vehicle that I know of that can short the Shanghai Index. I would be very interested to hear from any reader who knows of one. However, I have not given up on inverse ETFs altogether. I just need to back test more vigourously before I use them. If I am right about another down wave in global stockmarkets, there will be plenty of opportunities to use them in the US markets in 2010.
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[...] at the charts for the Shanghai composite index which I have not talked about in this blog since Sept 29. Below is the daily $SSEC price chart. The Shanghai market has managed to recover quite a bit since [...]