I went through a lot of charts this evening, and came out of the experience feeling quite bearish. A half trillion dollar stimulus package in China prompted brief buying on Monday morning, but since then we have seen steady selling. Perhaps we are revisiting the scenario of forced selling by hedge funds and mutual funds. Whatever the case, the sellers are in control here, and I see few stocks I would consider buying. Despite the selling, there remains considerable bullish sentiment, I assume because "stocks are cheap".
Commodities remain in a bear market:
The major indexes have a little room before they challenge the October lows. XLF is almost there. I get the sense that the lows will not hold for this particular sector, but we'll see.
Going through individual stock charts, it was not easy to find good setups. Stocks are getting pounded, and bounces are getting sold quickly. Here are a few that look decent for short sales:
A number of Chinese stocks look like good shorts here:
On a related note, Bespoke Investment Group compares P/E ratios for US and Chinese stocks
Since US markets peaked last October, the S&P 500 is down 41%, while China's Shanghai Composite is down 68%. Over the same time frame, the trailing 12-month P/E ratio of the S&P 500 has gone from 19.62 to 20.21, while the P/E ratio of the Shanghai Composite has fallen from 45.85 all the way down to 14.31.
The question that arises is what happens with forward earnings. China's economy is heavily based on exports. The recently announced $585 billion stimulus may help maintain future earnings, although it is yet unclear whether the stimulus is really an increase over previously planned expenditures. As Brad Setser explains
China's policy response is directionally right. A large domestically oriented stimulus is exactly what is needed. $585 billion is over 10% of China's GDP – so it is large. At least it if it is really new money.
Unfortunately, as the FT's Geoff Dyer notes, that isn't clear yet. If the stimulus is mostly just funds that China would have spent in any case, its actual impact will be modest. But if it is real new money, it could be large enough to make a difference.
The big question though is whether it can be put into effect quickly enough to offset the likely downturn.
It isn't totally inconceivable that the y/y increase in China's exports could go from over $250 billion to something close to zero …
On the other hand, if China can act quickly enough with an increase in expenditures, Chinese stocks will provide excellent return. From a trading perspective, when we see sign of a bottom, I will be watching these stocks closely.