The Shanghai Composite (
FXI
,
quote
) jumped 3% over a two-day span in the middle of this week after
dropping substantially on Monday on the back of bad news out of
Europe.
[caption id="attachment_52960" align="alignright" width="300"
caption="Better than expected flash manufacturing PMI saw the
Shanghai Composite move higher"]
[/caption]
While the Shanghai Composite, along with other global exchanges,
struggled earlier in the week, the Chinese exchange staged a rally
on Wednesday after the more onerous terms of the Cyprus bailout on
retail investors were modified; as well, a positive reading from
HSBC on the Chinese manufacturing sector boosted sentiment among
traders.
Although the previous month's HSBC Manufacturing PMI
disappointed investors,
as we pointed out
, these numbers were not necessarily indicative of the health of
the Chinese economy going forward given that February's reading
occurred during the Chinese New Year holiday, a weak period for
manufacturing.
With the
HSBC Flash PMI coming in at 51.7
- a reading above 50 indicates sequential growth - well above
analysts' estimates of 50.8, some pessimism surrounding the Chinese
economy could dissipate.
The negative perspective towards the Chinese economy has
festered over the past month, resulting in a 10% drop in the
Shanghai Composite.
In spite of the two-day rally in China's benchmark index, this
downtrend remains intact; however, more good news pertaining to the
Chinese economy could see the Shanghai Composite resume its rally
that lasted from December to February.
Tom DeMark of Market Studies LLC
espouses this point of view
; he correctly predicted the short-term top in the Shanghai
Composite in February, and he now sees the market surging 48% from
its December lows by September.
If the Chinese economy receives more positive news, inflationary
pressures remain in check, and developers see minimal effect on
sales after this month's new property curbs, the Shanghai Composite
could be poised for a breakout.
However, if the extant downtrend remains intact, traders should
continue to play the Shanghai Composite on the short side.
