The Chinese stock market has been eerily quiet of late – is that about to change?
Outside of a record tight 2-month trading range in stocks this summer, there has been no shortage of market news, stimulus and action so far in 2016. And it has come from all over the globe, from the breakdown in U.S. stocks to begin the year, to their eventual July breakout; from the Brexit shocker to the continued struggles among European banks; and from the re-emergence of emerging markets to the re-awakening of the precious metals complex. But, speaking of re-awakening, one market that has eerily quiet this year, in our view, is China.
This is particularly so in contrast to the manner in which the Chinese stock market captivated the investment landscape over the 18 months prior. Specifically, China’s Shanghai Composite (SSEC) was all the equity rage as it skyrocketed 150% in parabolic fashion from June 2014 to June 2015. Subsequently, market observers were equally riveted by the index’s outright collapse as it lost some 80% of those gains in the 7 months following. Since January, however, the SSEC has traded in roughly a mere 17% range – and has completely avoided the headlines. Perhaps that will soon change as this sleeping dragon may be poised to wake up.
As we see in our Chart Of The Day, the SSEC has been walking up a shallow, rising trendline (on a log scale) since it bottomed in January. The interesting thing is that if you extend the trendline back to the left, it intersects the index’s launch point in June-July 2014. The other pertinent development is that the SSEC is presently testing this trendline once again, just beneath the 3000 level.
So why would the Shanghai Composite be poised to make more noise soon? In our view, if the SSEC breaks this uptrend, it could be subject to an acceleration of selling pressure based on the break. The January-February lows of this year lie at around 2640 and a test of those lows would signify a 10% drop from current levels. That test could come quickly upon a trendline break. And that would certainly put the market back into the headlines.
Before we anticipate this development, however, we must assume the trendline will hold – until it doesn’t. There is certainly reasonable upside still from last year’s violent unwind of the SSEC’s 2014-2015 moonshot. A retracement closer to the mid-3200 level would have been a modest expectation for this post-January dead-cat bounce. Whether that occurs or not prior to a potential trendline break, we’ve no idea. It would certainly forestall any major headlines on the market.
However, given the shallowness of the uptrend and the inability of the SSEC to generate any distance between itself and the trendline, the odds are fairly good that the line is eventually broken – and this Chinese dragon will begin to roar once again.
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