Shanghai cracks

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As mentioned in yesterday’s edition of “Words from the Wise“, the Chinese Shanghai Composite Index has now recorded four consecutive down-weeks. The Index witnessed another massive sell-off this morning, declining by a further 6.7% to take its total loss since the peak of August 4 to 23.2%.

The losses happened on concerns of large Chinese share issuance and slowing bank lending. The banking regulator has already instructed lenders to raise reserves to 150% of their non-performing loans by the end of this year – up from 134.8% at the end of June, and the central bank has increased money-market rates to drain liquidity.

I have written a fair bit over the past two weeks about the overbought level of most global stock markets and also how China – a leading market on the way up – could be the catalyst for triggering a reversal of fortune in global stock markets.

Of the global stock markets I monitor, the Shanghai Composite (2,667) is the only one to have breached its 50-day moving average (3,125) and now has the key 200-day line (2,476) firmly in its sight.

31-augustus-09-2

Source: StockCharts.com

Interestingly, emerging markets have now seen two back-to-back weeks of declines and have been underperforming developed markets for four weeks running, as shown by the declining trend of the MSCI Emerging Markets Index relative to the Dow Jones World Index. Could this be a sign of a broad retrenchment in risk appetite?

31-augustus-09-3

Source: StockCharts.com

A global stock market correction could take the form of either a pullback or a consolidation (i.e. ranging). I suspect we may see at least some degree of reversion to the 200-day moving averages in a number of instances, but will be watching closely to ascertain whether we are dealing with a normal short-term correction or a more significant move threatening the primary trend. In the meantime, sit tight and be cautious as markets hopefully realign with the reality on the ground.

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5 comments to Shanghai cracks

  • rich

    Interesting that you recommend “sit tight” instead of “sell!-sell!-sell!”.

    I think you are right, and I will do so for now.

  • Frank W

    It looks like you are going to be right, Prieur. It looks like the Shanghai Composite corrective wave is setting itself up to go right thru the 200-day MA. It may be headed for the 2000-2200 level, where there appears to be substantial support.

  • It would be nice to know a little more about Prieur’s trading-investment strategy. From what I have gathered Prieur is a long term investor and my guess is he tries to do most of his buying at when markets are at their lowest levels. So I’m guessing he was buying energetically from December through to May. In which case his interest now is exactly as he has stated is this a correction or something more sinister?

    Marc Faber says that the March lows will hold because central banks will simply print more money to support prices but he doesn’t seem to take into account that because currencies are debt based most new money takes the form of a loan and when people are looking at falling asset prices and they are effectively heavily leveraged in one way or another they go into a paralysis of fear. This is what the credit crunch was.

    Is there any reason a correction could not turn into a free fall as the same concern appears again. Even central bank aren’t really giving money away.

  • Incidentally I love “Shanghai Cracks” as a dramatic heading for a post.

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