Seems like we got a good ducking out of the trade-in trend given today’s rather impressive Chinese fall of 2.6% close-on-close and 3.4% intra day following Premier Wen’s remarks that housing curbs shall be in place until the market finds traces of sanity. Bernanke, listening? This is how to control inflation expectations, and some people are saying bubble territory? Maybe, but I’ll take an unlevered drop of 40% over a levered 3-to-1 drop of 20%! (Reason for my sanguine feelings: Only 18% of Chinese house owners have mortgages! You can actually call them owners, rather than the American equivalent – administrator turned squatter.)
Government going out and saying housing isn’t in the cross hairs for easing like banking RRR’s, possibly interest rates and tax diversions is a sign that they’re taking this seriously and they’re making crucial differentiations. We westerners are pretty good at the “Print ALL the money!” or “Spend on ALL the projects!” or “Raise/lower ALL the taxes!” decisions, but I think China, from taking a deliberate, fragmented and sequential approach, has learned to differentiate between different areas of its economy. Again, I think they know their data better than the outsider bears, thank you.
Still, the stock market is greatly down, and it’s all the hard landing coming in, or the European worries feeding through, or the market front running yen weakness, or… technicals. Feel free to spit out your breakfast cereal when you read this. Technicals?
Yeah, take a look at the below chart. It’s simple, and uses predominantly fibs and two trend lines. The top fib is matched with the consolidated bottom in 2008, but drawn with the bottom marker near the up trend start, so you can see where I hooked my trend lines and why they’re hooked there. The peak was obviously a bubble bursting, but do keep in mind the general very linear fashion in which the trend is going down from the peak, causing logarithmic acceleration (1 000/20 000 < 1 000/8 000) and making the fall more intense as it goes along. China A50 stocks index, weekly candles since 2007:
Those trend lines are basically the major lines that have held the index for a longer time, so just see for yourself if you think that today’s drop was entirely fundamental.
Now, here’s a more detailed view, ignoring the bull peak but including more trend lines on the weekly time frame:
The red lines that start the chart are from the very top. What are they representing? Policy tightening or macroeconomic contraction, in short external pressures on the companies or markets. Then the blue line comes in and acts as a support, where the channel is formed with the fib lines drawn, here re-modelled in blue as well to highlight the move. (The yellow lines shown in the previous chart are unchanged.)
Then bubble and overvaluation fears start coming in, and force the top to blow out, and from there it is basically an expectation on a reflated bubble, given how fast China rebounded given the 4tn yuan stimulus, etc.
After a while, you get policy pullbacks, and talks of new tightening, lack of new RRR or IR cuts, etc, and falls back to the bottom trend line. We get initial eurozone worries and subsequent resolutions, and a discussion of return to growth in the US and continued high exports out of China, causing a new hit on the upper trend line a few months later.
Now things get interesting: we start getting more pressure from the government to rebalance, and even though euro zone fears are still high, China maintains a healthy clip of expansion, so while the world’s stock markets are soaring pretty wildly up until the summer, tightening gets a new showing, with predominantly RRR hikes and the world’s media discussing Chinese overheating. True to form, this gets the same logarithmic acceleration effect (but much milder) as the previous tightening cycle when the world runs into problems with US debt downgrades, reinvigorated Greek worries, and more stuff you’re tired of hearing of by now. Thus, I use the same style of red trend lines for this linear pattern, and notice how this channel lines up parallel to the dashed red line (bubble warning) giving more credence to the fall.
Then what happens as we turn the corner from 2011 to 2012? Well… policy easing discussion and RRR cuts, tax incentives, etc. so naturally this is represented by a blue stimulus/easing line.
Also note how the trend was not tagged on the downside before the run up, perhaps a logarithmic artifact, but much more likely an effect of “premature” change in trade psychology. The ovals highlight the resistance that comes in before the fib, and that coupled with the negative trend line seems like more than enough to explain to me why the fall occurred today. We’re simply too high right now from the technical perspective. Still, we should now look at that trend line upwards for further support since liquidity is sloshing around the system, and larger tail risks have been pushed further out the time horizon in Europe and Japan and the data keeps coming in well from the US miraculously enough.
Longer term, I am making a case for a similar bubbling up pattern that got punctuated by the red dashed line, at least pushing the index up a further 20% (bringing P/E numbers on aggregate index current earnings to 16-16.5) or more on a policy easing scenario. I will be watching this one periodically!