[ Ian is a long-term Member in Ireland, a trader and an author of a popular book. Here he shares important research he did with another Member ]
Over the weekend fellow SpikeTrade member Bo Lu and I looked at stocks in the mainland Chinese equity market making new highs and lows and the data has me scratching my head.
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The CSI300 index (blue price bars) tracks 300 ‘A-share’ stocks on the two main exchanges of Shanghai and Shenzhen. There are approx. 4000 stocks on the exchanges and the index is weighted by free float market cap (similar to the S&P).
Looking at the Pessimism Indicator (New 20-day lows expressed as a %, plotted as the red line) we notice three recent peaks where 45% of all stocks were making a new 20-day low, yet the index is trading above its +3ATR line. When we merge monthly, quarterly and yearly new highs and lows into the Composite Help Indicator (NHNL indices merged, expressed as a % and plotted as the orange line) we see a similar story.
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On a weekly chart the picture is even stronger. Using a rolling five-day sum of Composite Help shows a massive bearish divergence.
One can only draw one of three conclusions from this:
(a) Our data is wrong (we don’t believe it is)
(b) A small number of heavily weighted stocks are supporting this benchmark index, so it is no longer an accurate gauge of the Chinese equity market
(c) A serious correction is about to happen in Chinese equities
7 Comments
Gregory K.
Great work Ian M and Bo Lu. So if we believe that there is going to be a correction in the Chinese markets, are there any trade(s) we can make in the US markets equities or commodities including forex? Thanks
Gianluca L.
Very interesting Ian and Bo. The NH-NL on US stocks often shows the same discrepancy, so I would not say that Help/Pessimism are not accurate gauges. Instead, I would say that whether point B or C applies, the conclusion is the same: high degree of inertia on the Chinese index.
I echo the comments about the credibility of Chinese financial data.
Ian M.
Gregory – it’s difficult for retail traders to short the Chinese equity market, ASHR(ETF) is a possible long play but like all ETFs of overseas markets – Mind The Gap! (at the open).
Simeon, Jim & Gianluca – Hence we look at market internal data such as NHNL.