One of Many Reasons

If you only considered China’s world-average-pouncing GDP growth rates, you’d likely assume its stock market is market-leading too.

It’s not!

China’s Shanghai Index is getting left behind. As the Dow Jones Industrial Average gained 120% since March 2009, the Shanghai is up just 16%. And, it’s been grinding lower since August 2009. Take a look…

See larger image

China’s stock market has traded in a well-defined, down-sloping price channel for three and a half years now. This gives us some predictability in estimating the extent of future price moves.

As I write, the Shanghai is about 8% off its recent highs. I’m expecting it to drop further. Another 7% to 23% from current levels in fact. While there are many – many – reasons we believe China is in for a hard landing over the long-haul, there is one specific reason I’m expecting short-term drops ahead…

Looking to the chart above, you’ll see the most recent price peak pierced the uppermost zone of the regression channel. This has happened three other times since 2009. And each time prices peaked at that point, they subsequently fell back to the middle of the channel, at a minimum, or the lowermost zone of the channel, ultimately.

Using the Shanghai’s past moves as a guide, I’ve identified three downside targets in the Shanghai Index: 265, 240 and 220. These levels represent drops of 7%, 16% and 23%.

If you’re a China bull, you may have a dip worth buying several months from now. But not today. For now, steer clear of this market until the correction plays out.