Monday, November 24, 2008

Time to Be Long China?

Back on October 10, 2007, in a post with the title When to Short China? I predicted:

Eventually, there will come a time when you will look back and say to yourself, “Why wasn’t I short China? It was such a no-brainer…”

In the 13 ½ months since that post, the iShares FTSE/Xinhua China 25 Index (FXI) has fallen from a split-adjusted 63 to 24 and change, a loss of about 62%.

Now predicting tops and bottoms is always a dangerous parlor game, but investors should always be wary of potentially important tops and bottoms.

Returning to China, notE that in the chart below, last week’s low in the FXI was about 5% higher than the October low, with Friday’s rebound accompanied by record volume. I would not likely confirm a rally in FXI until it closed over 28 or so, but the signs of a bottom look more promising in the FXI than they do in many corners of the U.S. equity markets.

There is considerable disagreement about how much of the $586 billion Chinese stimulus package accounts for new spending and how much references projects that had already been committed to, but were relabeled to fit under the stimulus umbrella. There is also a broad range of opinions around the amount the Chinese economy has slowed, with current estimates pointing to economic growth of 7% at the high end to perhaps the possibility that the Chinese economy might be shrinking. As additional light is shed on these issues, expect the FXI to lurch dramatically up and down. Do not be surprised, however, if the October 27th low of 19.35 turns out to be the bottom.

[source: BigCharts]


Jeff Pietsch CFA said...

I think this is a good call, Bill, but would wait for a small pull back first. Good work, Jeff

Bill Luby said...

I note that Chris McKhann of optionMONSTER has a similar call this morning, based on the options activity in FXI: China ETF gets bullish call action

Anonymous said...

You may be jumping the gun a little bit. But if you're right, the relevant fork would look like China

.. which doesn't look bad.

But in terms of narrative I'm more impressed with the potential for Japan to finally make a bottom in its long long bear market. The inevitable financial restructuring that will occur throughout Asia will put a foundation under what has been really spectacular region wide growth (Look at Indonesia). But Japan will benefit most from this restructuring because it will mean less insider dealing and more institutional transparency, giving an edge to Japan's mature and well managed businesses.

Anonymous said...

The FXI index increased almost exactly 10.0% from its Nov 21st low to its close today. The FXI index is still underperforming the overall market as the benchmark SPX 500 index increased 15.6% during this time. The HGX index increased by 32% from its Nov 21st low to todays close, despite the negative housing statistics that were released today. The XLF index increased 36% from its Nov 21st low to todays close. The FXI low of 19.35 that occurred on Oct 27th (down 73% from its double top of October 2007) is probably the 2008 low for this index. The DJIA and SPX indexes closed higher three consecutive days. I project that the Nov 21st lows of SPX 741 and DJIA 7450 will not occur in the months of Dec 08 and Jan 09.

Anonymous said...

I told you the VIX wasn't mean reverting....

The Chinese are so screwed they don't even know how screwed they are. The Chinese have two options keep buying up Treasuries which we will inflate to zero at some point in the future. Or suffer from a massive fall in demand in the US for their goods which will reduce the income of their citizens which will also reduce the Chinese demand for Chinese goods.

Thanks for the free money, China, good luck with that whole prosperity thing...

Welcome to screwed, population: 1.3 billion

Full disclosure: I have a long short trade on using the FXI

vovor said...

Impressive call, Bill.

vovor said...

Time to be short China? (EW-based point of view)

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