Never mind China's reputation for cooking the books; its raw
uncooked economic data is sagging.
China's unexpected drop of 18.1% for February exports was the
biggest decline in Chinese exports in almost five years and its
biggest trade deficit ($23 billion) in two years. (Analysts, that
over-optimistic bunch, had forecasted a 7.5% rise.)
In January, a survey-based indicator of China's manufacturing
sector fell for the first time since Sept. 2012.
All of this puts into question not just the oddball cocktail mix
of BRIC nations (Brazil, Russia, India, and China) (NYSEARCA:BKF)
and a weirdo investment mix (thank you Jim O'Neill), but the very
idea that mega emerging economies operate independently of their
global peers. Decoupling is a farce.
Cleary, the People's Bank of China (PBOC) is concerned about
China's domestic economic growth prospects, otherwise they wouldn't
have slashed the yuan's (NYSEARCA:CYB) reference rate by a
China's economic prospects are further complicated by the
solvency of credit backed "wealth trusts", declining real estate
prices (NYSEARCA:TAO), and its inescapable domino effect on Chinese
banks (OtherOTC:BACHY). Since the full brunt of this developing
credit event has yet to be felt, bullish declarations that China's
credit problems are near their end, are premature.
More important than China's economic data, is the ragged
performance of China's stock market. As a leading
indicator, Chinese stock prices have been signaling problems
ahead for quite some time.
The Shanghai Composite over the past four years shows a
descending chart pattern of lower highs. Although the downtrend
subsided when the index hit 2000, each of the last three bounces
has resulted in a lower high with the downtrend performance
uninterrupted. (See graph) Contrary to what emerging market bulls
say, this isn't a buy signal.
After issuing a 12/6/13 buy alert on ProShares UltraShort FTSE
China 25 ETF (NYSSEARCA:FXP) at $58.60, the
Profit Strategy Newsletter
"From our vantage point, the prudent investor has two better
choices: 1) Aggressively short Chinese equities, or 2)
Aggressively avoid them. Right now, market prices are saying the
Chinese stock market will get worse before it gets better. That
means if you're the least bit bullish on Chinese stocks, you best
wait for lower prices before plowing in for the long-run."
Chinese stocks as measured by the SPDR S&P China ETF
(NYSEARCA:GXC) have already slid more than 8% when we issued our
FXP buy alert. And on Feb. 10, we sold the final leg of FXP
at $75.50 for a blended two-month gain of 23.5%. FXP aims for
double daily opposite performance to large cap Chinese stocks. That
means if Chinese equities fall 1%, FXP should be up 2%.
Since its Nov. 2010 peak, the iShares Large Cap China ETF
(NYSEARCA:FXI) has slid 26%, already surpassing the official
definition of a bear market decline, a 20% fall from peak to
trough. Our tandem FXI options trade is still open and is the right
place for hungry bears, among others (NYSEARCA:YANG). Are even
larger gains ahead?
Chinese philosopher, Lao Tzu said, "A journey of a thousand
steps must begin with a single step."
While that's true of life, it's also true of China's unfolding
bear market, which is like a train wreck journey in slow motion. On
some days, it may seem like the wreck has gone away and won't
happen. But for patient and prudent bears that are correctly
positioned, the reward for staying the course when the day of fury
arrives should be great.
The ETF Profit Strategy Newsletter
uses technical, fundamental, and sentiment analysis along with
market history and common sense to keep investors on the right side
of the market. In 2013, 70% of our weekly ETF picks were
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