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)

Category: Contrary Indicators, Markets

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9 Responses to “The Chart That Keeps Us Up At Night”

  1. Conan says:

    When I was studying at the University in the early 80′s all the Professors were telling us how the Japanese will be taking over the world..In the movies and in the press this was widely stated…Fast forward to 1989 and look at the chart…now look at it from 1989 till today…next look at what everyone is saying about China…it will also conquer the world…the “Factory of the World” … will soon pass the US and be the next world power.

    Now look at the Nikkei and the Shanghai & remember history doesn’t repeat itself exactly, but it rhymes.

  2. machinehead says:

    Shanghai’s market index is affected by the sector composition of its largest-cap stocks, which are concentrated in finance and energy.

    Check the charts of XLF and XLE for an example of how the New York index might look if its largest caps were all banks and oil companies, instead of (for example) Apple, IBM and Microsoft, all of which rank in the top five of the S&P 500.

    As a developing economy, China’s service sector (and stocks associated with it) is small compared to developed markets.

  3. Moopheus says:

    “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.”

    The chart keeps you up at night, but you don’t know whether what it’s telling you is good or bad? Market could go up, market could go down; don’t need a lot of lines and circles to know that. So either man up and say one way or the other or admit the chart is useless as a predictive tool.

  4. droubal says:

    “What does the continued poor performance of the Shanghai signal?” Maybe it implies that if you don’t have a central bank stimulating the market, in this kind of economy, that your home market won’t do very well.

  5. Conan says:

    If memory serves me correctly the Chinese Central Bank massively stimulated the economy after the last crash (2008).. Furthermore as a percent of GDP it was one of the largest done, way more than the Fed or the Europeans.

    However you don’t see the up cycle like in the S&P 500 from 2003 to 2008 or once again from 2009 till today. The Shanhai looks more like the chart of the Nikkei or the NASDAQ after their bubbles burst.

  6. george lomost says:

    This summer’ rally is reminds me more and more of the summer of 1987.

    But what do I know?

  7. Concerned Neighbour says:

    The western central banks have essentially proclaimed the markets will never fall again. If they were to come out and tell me where the implicit put level lies, perhaps I too would “invest” (read speculate) in this ever-growing bubble. As it is, I’ll stick to the precious few decent values out there, and leave the world to its moral-hazard free, short-term thinking insanity.

  8. george lomost says:

    Agree with Concerned Neighbor.

    In 1987 it was “portfolio insurance”, now we have the” Benanke put” with a Draghi put (squared) in the wings.

  9. Marc399 says:

    “The chart looks ugly and ready to break to new lows after its post crash peak of 3,477, way back in August 2009.”

    I hate this kind of analysis. Every chart looks ugly and ready to break to new lows…when it’s right at the bottom.

    China is incredibly important to the world economy. The rest of the article has useful info.