Since hitting 6,000 in the waning months of 2007, the Shanghai Composite Index has been in free fall, dropping more than 60% over the last four years. Virtually every other foreign stock market has outperformed the Chinese stock market.
A combination of several highly publicized bookkeeping frauds along with central bank tightening has conspired to wring much of the speculative excess out of Chinese equities. No one can argue with the long-term growth prospects of China, but what about over the short term?
Is now the time to buy?
You can see from the chart below that the Shanghai has experienced a stunning 10%+ rally over the last 10 trading sessions and has successfully closed above its downtrend line.
A recent spate of good economic news seems to have caused a buying panic. But we’ve been here before. Since peaking in late 2007, this index has had six sharp up-moves of 10% or more before the downtrend reasserted itself.
In my opinion it would be nothing more than a blind guess to say that now is the time of the turn.
One of the most active China ETFs is the iShares Trust FTSE China 25 Index Fund, FXI. This ETF gives you an overweight exposure to the Chinese Financial, Telecom and Construction sectors.
You can see from the chart above that FXI has already had a nice run up from the lows at $32 to a recent high of $39.50. But you are now moving right up into resistance at the $40 range.
Even if this is the beginning of a brand-new bull run, it is reasonable to assume that FXI will not break through resistance on its first attempt. There are a slew of investors who bought this at $40 that are looking to get out “even.”
So for now, I like this one on the short side with an optimum short entry at $40 with a $42 stop loss and a price target of $35.
So if China is a sell, what’s a buy?
I think you have to continue to focus on U.S. stocks because when you look at the negative real yields on bonds (meaning that if you buy government bonds right here, right now, you are locking in losses once you take inflation into account), you can see it doesn’t make much sense to own bonds.
The only way bond investors make money by buying bonds right now is if we slip into a period of massive deflation. This is when inflation rates turn negative. It’s certainly a possible outcome, but it’s one I just don’t see happening anytime soon.
So if deflation is not an immediate threat and bonds are guarantying losses, what’s an investor to do?
The play is still to buy good quality, high dividend paying American stocks. The key here, though, is to be patient. You probably have one more good downside scare left in the market before we can make a serious march on new highs.
The ETF I’d use is the iShares High Dividend Equity Fund, HDV.
It pays a very healthy 3.28% dividend and gives you exposure to some of America’s greatest companies, such as Johnson & Johnson (JNJ), Altria (MO), and Procter & Gamble (PG).
At the time of writing, it’s at $60.32. I’d use a pull back to the $59 level as a buy point with a stop loss level of $56 and a price target of $66.