David Fuller's view -
The Chinese and U.S. stock markets are going in opposite directions.
An intensifying crackdown against leverage in Asia’s biggest economy has rocked the hither-to unflappable Shanghai Composite Index over the past week, sending it to a three-month low last session. In the U.S., the largest equity market is embracing a risk rally spurred by the French election, with the S&P 500 Index continuing to build on reflation-trade gains ignited by Donald Trump’s November victory.
The divergence means the two markets are the least in tune since August 2008 -- just before the collapse of Lehman Brothers Holdings Inc. unleashed chaos on the global financial system.
Chinese officials have mainly kept mainland stocks on a tight rein after routs in mid-2015 and the start of 2016 reverberated through world financial markets. Until Monday’s 1.4 percent slump, the Shanghai Composite Index hadn’t fallen more than 1 percent for 86 trading days.
As Beijing’s focus on reducing risk in the financial system shifted from money-market tightening and reducing leverage to containing speculation and irregular trading, the two markets starting moving in opposite directions in the past month.
In one sense, it’s a sign that investors overseas aren’t as worried about Chinese market ructions as they were in previous years -- perhaps partly thanks to underlying strength in China’s economy. Given how mainland stocks have become increasingly linked to global markets, however, the divergence may prove to be a short-term phenomenon, according to Daniel So, a strategist at CMB International Securities Ltd. in Hong Kong.
“The Chinese government is squeezing speculation out of the market and while investors adjust, it will inevitably lag behind other parts of the world," So said.
The apt opening for my comment on the article above is this quote from the memorable Benjamin Graham:
“In the short run, the market is a voting machine but in the long run, it is a weighing machine.”
In the short run market moves are a matter of confidence. If a sufficient number of influential investors in the market crowd are feeling optimistic, they will buy. When others see the market rising they will also be tempted to buy in what becomes a self-feeding bullish trend. This will continue until most investors interested in the trend are already long.
While the market holds its ground for a short period, most investors will remain hopeful. However, when the market has clearly paused for longer than earlier on within the trend, some investors will be tempted to close their position. When the market has fallen back more sharply than previously seen, others will become pessimistic and also sell, causing a bearish trend to form which retraces more of the previous advance.
International investors face many more choices and this can be confusing. A practical way to monitor these markets is by looking at weekly price charts for the indices of interest, showing at least 10-years of back history for perspective. They will quickly reveal Benjamin Graham’s voting machine results in terms of relative strength or weakness over the short to lengthy medium term. Those longer term charts will also show bullish or bearish weighing machine characteristics.
So which stock markets look the most interesting?
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