China’s Last Stand

Chinese stocks have struggled mightily over the past several weeks.  Although new fixed investment and fresh stimulus programs have historically accompanied the transition of political power in China, the government appears to be taking a different turn this time around.  This includes the tightening of credit in order to cool a long overheating housing market and measures to dampen inflationary pressures.  None of this is supportive of a rising stock market.  And with the global financial system now in knots over the unfolding situation in Cyprus, the risks to the downside are only increasing.

China stocks as measured by the iShares FTSE China 25 Index ETF (FXI) are now under heavy pressure.  But this was certainly not the case until recently, after bottoming at around $32 per share back in early September 2012, the FXI rallied strongly over the next few months, peaking at around $42 per share through late January 2013.  From there the tide turned lower, however. The first downshift was swiftly to $38 per share, where the FXI found strong support through late February into early March.  But starting last week, Chinese stocks broke decisively through this support and have been moving sharply lower in the days since.

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Today, China stocks are making their last stand.  At $36.32 on the FXI as of late morning on Tuesday, it is perched right on long-term support at its 200-day moving average.  The bullish case might suggest a bounce may be imminent from these levels, particularly given that the FXI is now oversold based on relative strength and its momentum readings are now at bearish extremes.  But the 200-day moving average has not been a reliable source of support or resistance for China stocks over the last few years, and recent history from late 2011 has shown that the FXI can become much more deeply oversold before finally finding a bottom.  Furthermore, if the FXI does break decisively below what is already weak support at its 200-day moving average, an additional double-digit move to the downside to $32 per share would likely be in short order.

As a result, either now or following any short-term bounce in the coming days may be the time to close any remaining positions in FXI and move to the sidelines, particularly given the ongoing market uncertainty associated with the events unfolding in Cyprus and potentially across Europe.  And watching for any move to $32 per share on the FXI may warrant a fresh look at reestablishing positions.

Disclosure: I sold FXI on March 15 at just below $38 per share.

This post is for information purposes only. There are risks involved with investing including loss of principal. Gerring Wealth Management (GWM) makes no explicit or implicit guarantee with respect to performance or the outcome of any investment or projections made by GWM. There is no guarantee that the goals of the strategies discussed by GWM will be met.

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