Wednesday, December 5, 2012

Dramatic Countertrend Rally in Shanghai

In down-trending markets the reversals can be dramatic as the herd pulls the plug on short positions and, combined with selling exhaustion, results in 2-3-4% up-moves.
The tricky bit is judging whether these moves signal a change in direction or not. Both the 1982 and the 2009 Bull Markets began with dramatic jumps, as we saw in our May post discussing the Death of Equities:
The market bottomed at 776.92 on Thursday August 12th, 1982 and started moving fast:

Aug. 13 788.05

Aug. 16 792.43
Aug. 17 831.24
Aug. 18 829.43
Aug. 19 838.57
Aug. 20 869.29
Aug. 23 891.17

Just like that, 14.70% in seven trading days.It is also reminiscent of the current run off the Monday March 9, 2009 bottom of 6,547.05.

Four consecutive up days ending at 7,223.98 for a 10.33% pop.... 
The idea that markets (as opposed to individual issues) bottom by flatlining across the bottom is not one to make a bet on.

In the last couple weeks we've seen some positive forecasts:
Top Ranked Base Metals Forecaster: China Will Turn the Corner
Major Commodity Trader Sees China Turnaround
But the proof will play out over the next ten trading days. Back on September 7 the Shanghai popped 3.7% on news out of Beihing that there was more stimulus a-comin' but then resumed the long decline, hitting post-crisis lows in the last few trading sessions.

Here's the Financial Times' beyondbrics blog:
Chinese equities: a bounce at last
After a long decline to their lowest levels for four years, Chinese stocks finally bounced off the bottom on Wednesday on hopes of more action from Beijing to boost the economy.

The Shanghai Composite closed 2.9 per cent higher, with construction-related groups leading the way, headed by Sany Heavy Industry (up 10 per cent). This may be an over-reaction to the new administration’s proposals for an acceleration in urban development. But if these plans become policies, foreign fund managers who have been buying China recently will be congratulating themselves on their foresight.

Investors were also buoyed by news from the financial sector, with reports of government plans to relax rules on banks investing in insurance and news of HSBC selling its $9.4bn stake in Ping An Insurance , the second-largest insurer, to companies controlled by Thailand’s Charoen Pokphand Group....MORE 
China Daily points out that the strongest group was the cement companies, that would tend to confirm the relief rally hypothesis.

We've had a more than casual interest in China this year.