Having been bulls on China since December of 2008, and having published a “China Black Book” recently, you know we have an opinion on the monkeys calling China a “bear market” today. Stock market drops of -19.8% since August 4th matter, but so do year-to-date gains of +53% that include a -19.8% drop!
As a point of accountability, in Andrew Barber’s “China Black Book” there was a tactical overview section called “The Path Ahead.” It was there that Barber put some responsibility behind our recommendation, reminding our clients that the big YTD move in China was behind us.
Barber wrote on July 21, 2009:
“We believe that after this extended rally in Chinese equities, the “easy money” is now behind us and that at present the Shanghai composite has the potential to correct to its immediate term TRADE line of support of 3020 (a 7.5% correction from its peak) without any significant fundamental change in the underlying data. Price momentum carries risk. If there is a sustained breakdown of the 3020 level, the intermediate term TREND line of support for the SSEC is 2713 (a 17% correction from the peak) and that would be a critical risk management level in our model. Furthermore, the likelihood of a pullback of this magnitude occurring has increased exponentially as more “hot money” has surged into the market.”
Today, of course is August 19th, and one month later we are looking at the manic media freaking out about China being “over” at a closing price of 2,785 on the Shanghai Composite Exchange. Again, Barber’s TREND line of support is 2,713.
Could we, should we, will we, see a breakdown of 2,713? We will have to see about that wont we. For now, all we saw in China that was “over” was a bull market that was OVERBOUGHT.
In the chart below, my man AB and his crystal ball shows the long term TAIL line of support for the SSEC at 2,364. We suggest you use the manic media as your backboard to generate alpha in global macro. We remain “bullish of” Chinese equities, at a price.
Our long term China piece can be found at the link below.
Keith R. McCullough
Chief Executive Officer