Shanghai Cracks

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.

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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.jpg

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.


Originally published at Prieur du Plessis’s International Investment Blog and reproduced here with the author’s permission.

One Response to "Shanghai Cracks"

  1. george harter   September 11, 2009 at 7:04 pm

    Market ebullience rarely has any self control. Any change in the US market will be caused by massive churning down by the super-computer traders (GS, MS et al.) In fact their trading profits will EXPLODE in a massive market over correction. They will then, I believe, make billions on another dead cat bounce (hope rally) with support from the Treasury and Bernanke.Note, I do not believe that the market will make any real correction until the Chinese bring UST purchases to a halt and interest rates skyrocket! The increase will not be gradual, who else will buy in the volume of the Chinese? You are of course aware of the massive disaster that rising Fed interest rates will have on us.Herd mentality controls our investments, investors will continue to stampede in any direction they are manipulated. Will we ever see an end to the economists fantasies of RATIONAL ECONOMIC DECISION MAKING?George HarterBaghdadontheHudson, USA