MorningWord 11/6/15: Bulls in China Shop

by Dan November 6, 2015 9:31 am • Commentary

I’m not that impressed with the recent bounce in the Shanghai Composite. Some have called it a new Bull Market (it has risen 20% from its August lows). Bu to me it feels like a Bear Market rally in the most manipulated equity market in the world. On CNBC’s Fast Money last night Cornerstone Research’s Carter Worth highlighted the divergence between the Continuous Commodity Index and the Shanghai Composite of late. He suggested that Chinese stocks should be faded as commodities remain in a multi-year downtrend and are actually making 5 year lows. Watch here:

In the intermediate term I don’t disagree with Carter’s analysis. But in the very near term it seems that bad sentiment towards industrial commodities has hit a fever pitch. And the index Carter cites is now challenging the low end of the multi-year downtrend. It could actually be setting up for a counter-trend bounce, like Chinese stocks just did:


If that is in fact what happens, Chinese stocks could easily continue to run. Especially if the PBOC continues easing.  All that said, I would be very surprised if the powers that be in China are able to orchestrate a soft landing for the bubble that was their stock market. Despite the Shanghai Comp’s 26% rally from its August lows, it remains down 30% from its June highs.  It’s been my view that just as it did this past Summer, market forces would overtake heavy handed regulation affecting equity trading, and at some point the Shanghai would roundtrip the entire one year move back to 2500.  The recent breakout above the downtrend from the June highs has pushed out the likelihood of that happening in 2015. But I am hard-pressed to think that Chinese investors will be fooled by what is little more than stock market propping shenanigans.  Maybe it’s got 4000 on the upside, but that would be a great short entry:

Shanghai Comp 1 yr chart from Bloomberg
Shanghai Comp 1 yr chart from Bloomberg

So how does this help you make money here in the U.S.? Simple, on the way up in the first half of 2015, the Shanghai’s inflated stock market bubble did not help U.S. stocks as they remained in a fairly tight trading range, straddling unchanged for the year.  Until August, immediately following the surprise yuan deval, when fears of bubble bursting, both economic and stock market, devastated global risk assets.  Since August 24th, most equity markets have risen at least 10%, crude oil has risen 20%, the US Dollar (DXY) has risen 7% and US Treasury yields have risen 30 bps.

So bringing it back to China, and their equity “bull market” none of the above is really good for their economy and their recent stock market rally could come to a screeching halt if the FOMC were to raise interest rates in December. And the US stock market could get in front of it, as it appears to be doing today after the HOT US jobs data.

Higher US rates, means higher US dollar, which could mean pain for emerging market economies like China whose economy is fragile at best. And for those that are convinced that Q3 results from Apple, Nike & Starbucks show that, despite 6.9% GDP growth, China’s economy is just fine? Those same three brands are doing great in the U.S. as well, where overall retail sales and consumer confidence (despite the Oct Jobs data) is less than fine. Those Q3 results from three of the biggest brands in the world look more and more like an anomaly.