Chinese Stocks - Canary in the Coalmine?
In another move by the Chinese authorities to rein in its booming economy, China's central bank yesterday announced the third increase this year in the amount banks must hold as reserves. These measures, together with large stock issuance, have been weighing heavily on the Chinese stock market over the past few months.
Together with Hong Kong, Lisbon and Spain, the Shanghai Composite Index (SSEC) (2,868 at the time of writing) is one of the few major bourses trading below both its 50-day (3,051) and 200-day moving average (3,093), and also below its February low. The Index is now trading 13% below its January high and 53% down from its October 2007 bull market peak. By comparison, the S&P 500 Index is now 3% above its January high and "only" 22% below its 2007 high, indicating massive underperformance by Chinese equities (see declining relative strength line in the bottom section of the chart below).
Source: StockCharts.com
The SSEC Index appears oversold on the basis of short-term indicators, but a worrying picture emerges from longer-term, monthly data. Not only has the Index broken below its key 10-month (200-day) moving average, but the momentum oscillator (ROC) in the bottom section is on the verge of crossing below the zero line which will indicate a primary bear signal.
Source: StockCharts.com
The Chinese stock market was the first to turn the corner after the credit crisis sell-off - a full five months before the majority of indices bottomed in March 2009 - and is being watched closely to ascertain whether this market would be the first to spell danger for global stocks, i.e. the proverbial canary in the coalmine. Until clearer evidence emerges, the cyclical bull market remains intact but barely so, and I will monitor this situation very closely for a possible leash effect regarding global stock markets.
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Author: Prieur du Plessis
Dr Prieur du Plessis
investmentpostcards.com
With 25 years' experience in investment research and portfolio management, Dr Prieur du Plessis is one of the most experienced and well-known investment professionals in South Africa. More than 1 000 of his articles on investment-related topics have been published in various regular newspaper, journal and Internet columns. He also published a book, Financial Basics: Investment, in 2002.
He holds the following degrees: BSc (Quantity Surveying) (Cape Town), HonsB (B & A) (cum laude) (Stellenbosch), MBA (cum laude) (Stellenbosch); and DBA (Doctor of Financial Management) (Stellenbosch).
Prieur is chairman of the Plexus group of companies, which he founded in 1995. Previously he was general manager: portfolio management at Sanlam, responsible for the management of investment portfolios with total assets in excess of $5 billion.
Plexus is a pioneer in the mutual fund industry and has achieved a number of firsts under Prieur's leadership. These include the authoritative Plexus Survey, a quarterly analysis of the consistency of the performance of unit trust management companies, the Plexus Offshore Survey, the Plexus Unit Trust Indices, and the PlexCrown Fund Ratings.
Plexus is the South African partner of John Mauldin, American author of the most widely distributed investment newsletter in the world, and also has an exclusive licensing agreement with California-based Research Affiliates for managing and distributing its enhanced Fundamental Index™ methodology in the Pan-African area.
In 2001 Prieur received the Santam/AHI Business Leader of the Year award for corporate leadership, business acumen and entrepreneurial flair. He was also profiled in the book South Africa's Leading Managers (2006). Plexus received the AHI/Old Mutual Enterprise of the Year award in 1997 and was also included in the book South Africa's Most Promising Companies (2005).
Prieur is 52 years old and lives with his wife, TV producer and presenter Isabel Verwey, and two children in Welgemoed, Cape Town. His recreational activities include long-distance running, motor cycling and reading. He belongs to the Cape Town Club, Johannesburg Country Club, Gordon's Bay Yacht Club and Swiss Social & Sports Club.
Copyright © 2008-2012 Dr Prieur du Plessis
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