IS THE CHINESE MARKET FORECASTING THE END OF THE BULL RUN?
Back in February we asserted our opinion that China was becoming a leading indicator. They were the primary driver of the 2003-2007 bull market and their economy and stock markets clearly led the way into the bear market of 2008. Their markets bottomed in late 2008 while U.S. and European markets lagged. We are now beginning to see the first real signs of deterioration since the Shanghai began its incredible 100% move since the trough.
As we detailed in July, it’s highly unlikely that the Shanghai bubble of 2007 will end any differently than previous bubbles. In fact, it would be an anomaly. The likelihood of a long and drawn out recovery period is extremely high:
As China becomes the engine of global growth and a leading indicator of economic activity you have to wonder if China isn’t forecasting the next leg down in the market. As I type, the Shanghai is shaving another 3% off the index….U.S. indices, however, remain completely oblivious to the move just as they were at the 2007 peak and the 2008 bottom….
Totally agree – a leading indicator. The SSE has been consistently down for about 8 days now. However, since it last bottomed in November last year and had recovered somewhat by March that might suggest a 3 month lag.
I was thinking the same thing. I saw the Shanghai Composite around 3400-3500 a few days ago and now it is all the way down testing 3000. Same with the Russian markets down around 20% from their highs (not that Russia is anyway comparable to China). But still, it seems they are going through corrections while developed countries are still sitting at their highs.
We seemed to have an inflection point with the American consumer in June. Personal income dropped by the most in four years, credit contracted at twice the expected rate, and consumer sentiment peaked (using UM) around 70. That information began to filter through in the past couple of weeks with the poor ISM nonmanufacturing number and really poor retail sales number. It seems that China is more sensitive to this correction, given their dependence on exports for growth, and is pricing it in faster than the US.
I expect to see it translate to a US correction in the fall when banks begin to have to mark down Alt-A, Option ARM, and CRE portfolios.
That’s the key grant. With housing prices still stagnant/falling, incomes flat/falling and jobs stagnant/falling it is almost impossible to imagine a sharp economic rebound.
Navigating the market gyrations inbetween this long-term economic noise is a different matter altogether though. I think we’re nearing a major market extreme where optimism and market irrationality has run well ahead of reality.
The “buy the dip” mentality is exactly what I want to be seeing right now. It’s a great sign of complacency.