October 29, 2013 at 12:35 PM EDT
Will U.S. Stocks Outperform Chinese Equities?
NYSEARCA:FXI, NYSEARCA:FXP Related posts: Chinese Economy Finally Slowing; What It Means for Its Stocks Time To Look At Chinese Stocks Again? Why Now Is The Time To Buy Chinese Stocks An ETF To Buy Blue Chip Chinese Stocks On The Cheap

china etfsDouglas Davenport: If you ask people what they know about the Chinese economy and stock market, many of the responses you’ll hear are either outdated or just plain wrong.

The first thing you’re likely to hear is that China makes everything we consume. That’s a lot further from the truth than it used to be and, more importantly, it’s irrelevant to investors like us.

You’ll also hear that Chinese stocks are a solid gauge for copper and, therefore, a good way to forecast building and development in general. That type of generalization may fly in an economics class, but it doesn’t do us much good in the real world.

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Some perceptions that investors have about China’s stocks and its economy are just plain wrong.

Although what passes for accepted wisdom on China is relatively useless, I still look at a chart of the Shanghai Composite every week, and I pay particular attention to the support and resistance levels. Why? Because Chinese stocks do have an unmistakable link to the U.S. market.

China-U.S. Relations

One of the most enlightening metrics I look at each week is a chart I created comparing the Shanghai Composite ($SSEC) to the S&P 500 ($SPY). As you can see, this ratio has been in a falling channel since the U.S. market hit bottom in March 2009.


Click for larger version

Even more troubling for investors betting on a Chinese recovery are the technical indicators incorporated into the chart. The thin red and blue lines represent the simple 50- and 100-day moving averages, and the top chart is the Relative Strength Index (RSI), a widely used measure of momentum. Both indicators support the view that the Shanghai Composite will continue to weaken against the S&P 500.

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Related posts:

  1. Chinese Economy Finally Slowing; What It Means for Its Stocks
  2. Time To Look At Chinese Stocks Again?
  3. Why Now Is The Time To Buy Chinese Stocks
  4. An ETF To Buy Blue Chip Chinese Stocks On The Cheap

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