China Manufactures’s A Bubble – But the tyres have not burst…Yet

Sometimes it all seems too good to be true.  Cruising down the highway at full speed, your sports car tuned up, guzzling gas and feeling good.  Then the road surface turns rough and suddenly you find yourself off-road.  Then you realize you have pumped your tyres too full of air.  That is how China’s “People’s Party” must be feeling now.

Stellar growth, property values rising, more people lifted out of poverty, signs of relaxing central government control.

Hissssss, what’s that sound?  We have a puncture.  Perhaps we inflated that bubble too much too quickly.

When it comes to the Shanghai Composite (SSEC) that is exactly what was happening. With 120% growth in one year, the sports car was really humming.  The first signs of problems were in May 2015 when the market suddenly plunged.  According to my “Stock Market Crash Detector” we received a “Shock Event Warning”. See Article “China is ready to implode”.

Since then the Shanghai Composite is down 25%.

2015-09-28-ssec-china-crash

However, after that warning came a second warning on June 19th 2015.  After which the market to date lost 33%.

The peak loss for the SSEC has been 40% to date.  That is 40% in 4 months.  The Hang Seng has lost a little less at 25%, but all in all China investors must be feeling like the tyres on the sports car, seriously deflated.

The Chinese markets are taking a rest right now, RSI and MoneyFlow indicate that the market is oversold.  I suggest it is not oversold enough.  Look more closely at the chart.  My Buy/Sell indicators from the Stock Market Crash Detector system indicate that the SSEC is still a buy.  It has not fallen quite far enough (price crossing below the Red Line for one week) to become a raging bear market.  The insane growth of this market in the one year previously means that the price has risen so swiftly and so far from these long term indicators that even with a 40% drop we are not in a full bear market.  Algorithms cannot account for that.

Avoiding a collision.

The tyres are deflating, the road has become rockier, but the wheels have not come off yet.  Can the People’s party slow down the sports car and retake control?

Only time will tell.

 

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