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Chinese markets see short-term fall, but long-term gains

Editor: Li Kun 丨CCTV.com

01-07-2016 15:41 BJT

By Sol Palha, founder of Tactical Investor newsletter

A bird doesn't sing because it has an answer, it sings because it has a song -- Maya Angelou

In the short term, China is facing struggles. The Shanghai Stock Exchange bubble that popped last June has fallen sharply at the beginning of this year. 

 

Some estimates claimed the number of individuals opening new accounts without high school diplomas at over 60%.

Many investors were playing the markets with borrowed money, otherwise known as trading on margin. To circumvent the limits placed by regular margin trading, many turned to the shadowy banking sector, where one could borrow up to ten times the value of one’s stock holdings.

At the height of the mania over 500,000 new brokerage accounts were opened weekly, a clear sign that the masses felt ecstatic and believed it would only trend higher. Accordingly, the results were unpleasant.

Since June, the Shanghai index has shed more than 40%, and the government is trying to stabilize the markets.

Factors creating uncertainty

• There's a perception the economy is slowing down and corporations would face leaner times.

• Beijing is attempting to clean up the house. It has indicated that it is no longer willing to fund companies that are operating at a loss indefinitely. Such companies must cut down costs and streamline operations.

One suggestion put forward was for companies to merge to improve efficiency. In the short term this is not going to be pleasant as many large companies could go bankrupt, adding further uncertainty and markets hate uncertainty, the long-term outlook favors more pain.

The economy is in a transition stage and moving away from an export-based economy to a domestic one, and such transitions are never smooth. While the masses hate uncertainty, contrarian investors are already preparing a list of blue chips stocks to invest in for the long run.

There were plenty off signs warning astute investor that the Chinese markets were headed for a crash. The masses were Euphoric and many felt that the markets could only go up. 

This is the clearest signal that needs no deep knowledge of fundamentals or technical analysis. A simple understanding of the basic tenets of mass psychology is all that is required.

Mass psychology clearly dictates that one should be wary when the masses are jubilant and elated when the masses are cautious. 

Long term factors bode well for Chinese economy and stock market

China has a 49% personal savings rate, putting all developed countries savings rates to shame. China's Middle Class is still growing by leaps and bounds. There are over 109 million Chinese with savings at over $50,000.

While the middle class is getting decimated in America since 2000, twice as many Chinese as Americans have joined the middle class in this period. China accounts for a fifth of the world’s population and holds about 10% of global wealth.

This figure is set to rise dramatically in the years to come. Lastly, the number of millionaires in China is also skyrocketing. China now has more than a million millionaires.  These factors bode well for China going forward.

Technical outlook for China's market

The Shanghai Index has rallied sharply from its lows and is attempting to find support in the 3400 ranges. However, there is still not enough fear in the air, and there is a good chance that the Shanghai index could test the 2500-2700 ranges again. 

If 3400 is taken out on a weekly basis, then a test of the 2700 ranges will be inevitable. From a long-term perspective, any level below 3000 makes for a good entry point.

 

At this stage of the game, the astute investor should start compiling a list of stocks that they want to get into, so when the opportunity arises, you will be ready to jump in. 

We are creating a list of stocks and as soon as our trend indicator generates a buy signal we will be prepared to jump in. 

This is the same trend indicator that flashed an exit signal in June; we did not get out at the exact top, but based on our entry points we did not need to. Trying to time the exact top or bottom is an exercise in futility.

Conclusion

The Chinese government is doing a lot to address the current issue, the latest article from our close associate Tom McGregor highlights this issue in more detail. From a psychological perspective, the media is going overboard regarding its analysis of the Chinese markets.

They fail to understand that their markets are even more rotten, and so it comes down to a case of the pot calling the kettle black. There is not one shred of free market force operating in the U.S. markets after the Fed flooded the market with hot money. 

Our economic recovery is all smoke and mirrors. At least, the Chinese government is trying to do something to address the market's shortcomings, while in the U.S. all we are doing is printing more money to support our market and create the illusion all is well.

Fear is in the air, the crowd is getting nervous, so it's time to make a list of the top blue chip stocks you would like to own in China and wait for market pullbacks to open new positions. 

Some stocks have already broken out and are soaring upwards. One clear example is NetEase, Inc. (NTES); NTES just put in a new five-year high. Instead of believing the hype, take a cold hard look and you will see that in the long run the Chinese markets look far more attractive than our markets in the USA. 

Back of ninety-nine out of one-hundred assertions that a thing cannot be done is nothing, but the unwillingness to do it -- William Feather

This article has been prepared by Sol Palha of the Tactical Investor, where mass psychology and technical analysis intersect seamlessly.

 

( The opinions expressed here do not necessarily reflect the opinions of Panview or CCTV.com. )

 

 

Panview offers a new window of understanding the world as well as China through the views, opinions, and analysis of experts. We also welcome outside submissions, so feel free to send in your own editorials to "globalopinion@vip.cntv.cn" for consideration.

Panview offers an alternative angle on China and the rest of the world through the analyses and opinions of experts. We also welcome outside submissions, so feel free to send in your own editorials to "globalopinion@vip.cntv.cn" for consideration.

 

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