The Chinese Shanghai Composite Index – the index that led the turnaround in global stock markets by five months – seems to be in trouble. The Index has just become the first major index to breach its key 200-day moving average, often seen as an indicator of the primary trend. In order to guard against whipsawing one would have to wait a few days for the break to be confirmed.

ssec

Source: StockCharts.com

Whether this cycle will be characterized by China having led both bottom and top turning points will become clear in due course, but a study of previous declines in the Shanghai Index makes for interesting reading. According to US Global Investors – Weekly Investor Alert, in early 2004 and early 2007, when tightening fears haunted investors in a policy environment similar to the current one, Chinese stocks underwent a sharp selloff for a couple of months and yet finished the year higher as investors realized the economy was not headed for a hard landing (see charts below). This would seem to suggest that the stock market correction in China could present buying opportunities in the medium term.

chines-stock-3001

Source: US Global Investors – Weekly Investor Alert, January 29, 2010.

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More on this topic (What's this?)
Andy Xie on China’s Empty Apartments (naked capitalism, 8/4/10)
“The Top Chinese Company on my Radar Right Now …” (Stock Gumshoe, 9/24/09)
What the Heck Is Going on in China? (Contrarian Profits, 9/15/09)
Read more on Investing in China at Wikinvest

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