It is difficult to be more bearish

“Conversely, I would suggest you to think about something that is perceived deadly risky and no one is interested in it...... I think chance is high that we may see higher stock prices in ......in the next couple of months than lower.”

 

Recall what is this about that I talked about a few months ago? Back then, nothing was more bearish than this one. Still no clue? Well, it is about China! Check here see what I said in more details. In a nutshell, China is facing a seemingly deadly risk with fast slowing economy that is devastated greatly the ongoing US-China trade “war”. The headline news has been nothing but bad and it is still so. Sentiment-wise, I don’t think there is anything improving till now as China is still facing a mountain of issues that are difficult to manage. The thing is extreme sentiment either end is usually a contrarian indicator. When the sentiment is so badly bearish in this case for China, it has discounted almost all the bad news and the final selloff at that time is usually an exhaustive capitulation to trigger a bottom to be made.  This appears to be the case for Chinese stocks right now. Granted, since I posted my blog in Sep, the Chinese stocks continued to go down a bit and therefore it was not the exact bottom at that time. So timing wise I was a bit earlier as usual. I have been reminded again and again by friends that no one can time the market perfectly. I have certainly got it and actually totally agree with it. But if you think TA is simply about timing the market, I think there is some misunderstanding, at least for me. While it seems TA is trying to time the market, in reality and more precisly it is timing the sentiment extremes and then offer the most likely probability for the next major move. So you don’t need to be perfect in timing unless it is day trading, which is similar to long term value investment where you time the valuation instead of the exact stock price. Similarly no one can time exactly the lowest valuation for anything regardless how much analysis has been done. Back to the China idea, 3 months ago I thought it was in its bottoming process and the chance was high for higher prices in a few months. This is apparently the case by now as FXI has clearly broken out to the upside from its year-long downtrend line. More importantly there is another more bullish sign that I don’t think many people are noticing at all. You see, for the whole past year, China has been beaten down badly by the worrisome “trade war” and as such, the Chinese stock market has been overwhelmingly underperformed the US market till.....Nov! Quietly the tidal wave has changed since late last year and as you can see below, FXI has significantly outperformed S&P in the past 3 months. Don’t ignore this quite bullish sign, folks! This has reminded me the situation for the Brazil market over a year ago when the sentiment for it could not be more bearish and everyone was dumping it. Then without notice, it has revived and shot up in the past year, greatly outperforming the US market. Anyone who can spot such a turning point is well rewarded for sure by now! I think the Chinese stock market is at such kind of juncture and is poised for a major breakout from here. The near term catalyst for its next let up is obviously a concrete trade deal by end Feb. While no one can be sure if it will happen, the market is anticipating a deal already and so do I.  You may argue not to rush for a quick conclusion as even if there is a deal, it may not be a great deal as what Trump has hoped for. Indeed I also don’t expect a deal that will fundamentally changed China’s political and economic system. But at this point, what kind of deal means nothing really to the market. As long as there is a deal, the markets will be happy and shoot up significantly both sides. Not convinced? Just wait and see!

 

Be clear, this is a more risky speculation than usual as there is a lot of headline news that can easily swing the direction. We just got a taste yesterday when the market dropped severely due to the news that Trump-Xi meeting may not be held later this month. Believe me, China is making great efforts in trying to turn around the dire situation. If you dig deeper, underneath the bad news, there are many positive developments in China that will prove to be very positive for its economy moving forward. More liquidity from the Central Bank, relaxing tax rules, new legislation for opening up more for foreign investment......While it looks still a possibility that a final deal may not be sealed off by Mar 1, I think the chance is high that Trump may postpone the tariff hike based on the real progress in the negotiation that may need a bit more time to work out the final details.

 

While I won’t take it as a long term investment as of now, at least for the next half a year or longer, I’m bullish for China. As always, be mindful of the volatility that is for sure to be high for it!