The Chart That Keeps Us Up At Night

The only major global equity index which we monitor — and it is a big one – that is down for the year is the Shanghai Composite.   The chart looks ugly and ready to break to new lows after its post crash peak of 3,477, way back in August 2009.

The Shanghai is down 39.2 percent from its post crash high while the S&P500 is up 42.3 percent over the same period.   After falling 72.8 percent in a little over a year from its October 2007 peak, the Shanghai is now up a lowly 27 percent from it crash low.  This compares to the S&P500, which fell 57.7 percent from the October 2007 high to the March 2009 low,  and has now recovered 112.7% and continues to move higher.

A stunning divergence of the world’s two largest economies’ stock markets.

What makes us a little nervous is the Chinese stock market was the first to really collapse after peaking in the fall of 2007  and the first to bottom just a year later.    We can relax a little as such a large and sustained divergence since August 2009 largely dismisses the notion that the Shanghai leads U.S. and global equity markets,  however.   The chart below illustrates even the Hang Seng, one of our favorite indicator species for global risk appetite, has decoupled from the Shanghai.

What does the continued poor performance of the Shanghai signal?   Not sure, but either Chinese stocks are holding a massive fire sale and the Shanghai is setting up for a huge bounce or Air China is crash landing.  And the latter, folks,  ain’t good.

Another 2o percent drop in the Shanghai from current levels and it will be testing the lows of the 2008 crash.  Keep this one one your radar.

(click here if charts are not observable)

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15 Responses to The Chart That Keeps Us Up At Night

  1. Pingback: Monday 7atSeven: a notable divergence | Abnormal Returns

  2. michaelarold says:

    I’m not concerned: during the last 20 years, US stocks have been leading China stocks. I posted a chart on my blog. http://www.michaelarold.com/2012/08/why-im-not-concerned-about-china.html

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  5. Anonymous says:

    The us stock market is manipulated by the PPT, so how can you compare the two?

  6. Gary says:

    Anonymous;
    Excuse me for my ignorance but what is the PPT?

    • fallingman says:

      The “Plunge Protection Team.” It’s the common term for the President’s Working Group on Financial Markets, which was set up following the crash of 87 to intervene in and manipulate markets to better suit the politicians and their sponsors on Wall Street.

      They sell it as a good thing, a mechanism to preserve stability in the midst of chaos. What it is, in reality, is just another tool the fascists use to control outcomes so that they’re to their liking.

    • Richard Grant says:

      Plunge Protection Team perhaps?

  7. eric taylor says:

    It is not just the multinational corporations leaving China for lower cost labor markets
    that is causing China to fall, but wouldn’t it be nice if we could get back some small part
    of the U.S. domestic content that we don’t have stabilizing our economy, like we used
    to have? A funny thing, that the Chinese went to private pay out of pocket healthcare,
    copying the U.S., which is now health care bankrupting China’s elderly end game, and stripping
    the Chinese of all of their over glorified 40% personal savings rate, that made them tigers.
    There are many contradictions due to the demographic changes that are taking place
    in China.

  8. CLS says:

    Who will we borrow from????

  9. a_obama says:

    The Chinese market is a buy right now if you are a value investor. Many stocks are traded a PE ratio below 10 and a PB ratio below 1.5. The chart shown here is a product of market manipulations by big brokage houses. It is not their economy in big trouble, but their trading game rules in doubt. If you look at their Venture Stocks index, it is a different picture.

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