China vs. US Stock Market: Which One To Trade And What To Trade

The US stock markets are clearly not healthy right now.  Every day we see new 12-year lows and there is no bottom in sight, no matter what the market experts say.  So what is an investor to do?  Putting your money into money markets will preserve your capital, but inflation will eventually whittle it away.  I say the thing we have to do is look for healthier markets.  I’m going to spend the next couple of days looking at other countries’ stock markets and see if any of them are in better shape than ours.

I’m going to begin this journey in China.  I have posted several videos from Jim Rogers touting China as the place to put your money.  He clearly believes this to be a turning point in history when China will take the world leadership position from the United States.  I certainly have no such grandiose beliefs.  But it might be a decent place to put some money to work in the coming months …

The Hang Seng

The Hang Seng index (^HSI) is the major index tracking the Chinese stock market.  I have a chart to show you which includes the ratio comparing the S&P 500 (^GSPC) to the Hang Seng.  I want to know if the Chinese market is outperforming or underperforming the US.

The ratio tells me that we have see relative outperformance in the HSI, but it is nothing unusual.  Apart from a steep underporming spike in late October when the index fell more sharply than the S&P, the ratio has trended in a range.  Should the ratio move out of that range - say 0.055 to 0.065 - then we might have a trade-able situation.  Until then we have a market that moves in line with our own.  That is the short term daily view - how about a weekly perspective?

This changes things slightly.  It looks like the market goes through periods of in-line performance with sharp turns into outperformance.  We could see another sharp turn in the future and then we would be wise to invest in China.

Another item that I see in the daily chart is the higher low that the HSI has formed.  The weekly chart shows good price support around the 12,000 level.  Only the candle “wicks” go below that level.  You could make the case for a symmetrical triangle that is forming both in the daily and weekly charts, and that this will ultimately break down similar to the similar pattern in the S&P.  Should that be the case, then you could argue that the US market is a leading indicator for Chinese markets - which would be good to know in and of itself.

What to trade

The Hang Seng is the Chinese index that we follow, but the iShares FTSE/Xinhua China 25 Index ETF (FXI) is how you trade it.  ETFs give us so many options, no?  It can be used similarly to our SPY (SPY) ETF.  I do not know if it is structured the same way, but for my purposes that is ok - it is a trading proxy.

Not too much different between this chart and the HSI.  I have added the MACD as an indicator to see what it could show us - which is a failed attempt of the faster line to cross over the indicator line.

Is the FXI really better than the SPY?

Take a look at this one month chart.  I’ve posted the candles for the SPY with an overlay of the line chart of the FXI - I figured I would go with the trading vehicles this time.  You will see that certainly last week the FXI was the winner.  However, the week prior it dipped much more sharply than the SPY.

The lesson is to use caution.  Do not assume that a relative outperformance in one time period will translate to a better trade in the week ahead.  Stock markets all over the world are in dire straights these days.

China’s Economy

I found a few Bloomberg videos on the subject which may prove helpful.  These will by no means make you an expert on China, but as a student of the markets, I thought I would share what I found.

The China economy is still showing growth.  There are economic worries about jobs.  The analyst is expecting 6-7% growth in China overall and does not expect any unrest from the unemployment.

There is a great deal of talk about another stimulus package from the Chinese government to promote infrastructure growth (sound familiar?).  The first package has not actually started yet, but they are considering another.

This Bloomberg video discusses the Chinese economy.  There was an expectation of stimulus yesterday but this did not come to fruition (sound familiar?).  The government is still forecasting growth of 8%, although some analysts do not believe this will be possible.  The topic of civil unrest comes up again and I believe this is a real risk in China.

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