I have been an avid reader of Martin Armstrong’s Economic Confidence Model.  In brief summary, there is the dumb money that follows the crowd while smart, or “hot money” is constantly looking for opportunities throughout the world.  Hot money can be the bane of governments, just as George Soros made over a $billion in a single trade against the Bank of England.  Hot money recognizes changes in the financial environment, while most investors are trying to keep the status quo alive.  Let’s examine the investment environment in China with this in mind.

 

The Shanghai Index was launched on July 15, 1991, with a base value of 100.  It may be considered one of the newest of the world class stock indexes.  Although China has recently grown to be the second largest economy, next to the United States, the Shanghai Index is still largely unknown among US investors.

I have labelled the October 2007 peak at 6124.04 as the top of Supercycle Wave (1).  The decline into the low in October 2008 is labelled Supercycle Wave (2), ending the first 17.2 year Pi Cycle from the inception of this index.  Cycle Waves 1 and 2 have taken approximately 34.4 months.  In technical terms, Wave 2 is a double zig zag flat.

 

Let’s take a closer look at the pattern on a daily basis.  There was no trading last week, due to the Chinese “Double 9″ Festival, so there is a week-long gap of trading information that is missing.  Nonetheless, the index declined this week within 4 points of its previous low.  There seems to be little or no activity in the index yet, but I can say that what caught my attention is the Shanghai Index may be due for a dramatic change in trend from a cyclical perspective.

 

Investors cannot trade directly in the Shanghai Index, but they may invest in shares of Exchange Traded Funds, such as FXI, which mimics the movement of the price and yield performance of the FTSE/Xinhua China 25 Index, the largest and most liquid stocks traded on that exchange.

As you can see, the lack of trading in the China mainland has not stopped this ETF from a sizzling 18% rally in the past week.  Rather than trying to chase this kind of performance, savvy investors will patiently wait for the inevitable pullback to more reasonable prices before taking a position.

Good luck and good trading!

Tony

Anthony M. Cherniawski

The Practical Investor, LLC

P.O. Box 129, Holt, MI 48842

www.thepracticalinvestor.com

Office: (517) 699.1554

Fax: (517) 699.1558

 

Disclaimer : Nothing in this email/blog should be construed as a personal recommendation to buy, hold, sell or short any security. The Practical Investor, LLC (TPI) may provide a status report of certain indexes or their proxies using a proprietary model. At no time shall a reader be justified in inferring that personal investment advice is intended. Investing carries certain risks of losses and leveraged products and futures may be especially volatile. Information provided by TPI is expressed in good faith, but is not guaranteed. A perfect market service does not exist. Long-term success in the market demands recognition that error and uncertainty are a part of any effort to assess the probable outcome of any given investment. Please consult your financial advisor to explain all risks before making any investment decision. It is not possible to invest in any index.

 

 

 

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