by Michael Tarsala
The sharp decline of Chinese stocks amid the U.S. market rally has analysts worried, but not Michael Arold, manager of the Techncial Swing investment model.
He makes the case for why it gives an early positive signal for Chinese stocks.
Here is a chart from the Global Macro Monitor blog that explains the analyst concern:
Source: Global Macro Monitor
The S&P 500 is up more than 42% from its 2009 lows. The Shanghai Composite, however, is going the opposite direction, and is down more than 39% from its 2009 high. To some, the crashing Shanghai is being seen as a possible sign that the Chinese economy could suffer a hard landing. Perhaps the sliding Shanghai is the market that will lead the S&P and other global exchanges lower.
Arold, however, took a look back at the longer term, and notes the following:
There have been four multi-month periods since 1995 where Chinese stocks declined while U.S. stocks rallied. Each time, Chinese stocks eventually joined the U.S. stocks in their upward path.
Not once in 20 years did a decline in Chinese stocks lead the U.S. stock market lower.
U.S. stocks generally led to the downside, as well as the upside. The Shanghai continued to rally in 2001 in the early part of the U.S. crash, but eventually it moved lower with the S&P. Also, in 2007, the U.S market peak came ahead of the Chinese one.
The black line at the bottom of Arold's chart is also telling. It's the rolling correlation of the S&P and the Shanghai. A rebound in that line from a low could be seen as a signal to buy Chinese stocks on all three past periods in blue.
Perhaps an increasing correlation is something to watch yet again.
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