Market Overview

China Shares Rally as DeMark Calls Bottom

China Shares Rally as DeMark Calls Bottom
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Chinese shares, represented by the Shanghai Composite Index, rallied nearly 2.9% Wednesday after hitting a 42-month low just a few days ago.

A number of factors combined to ignite today's rally, chief among them a policy statement by China's new president, Xi Jinping, addressing his first Poliburo meeting since being named president. "'We will keep continuity and stability of macro-economy policies, prioritising on making policies more targeted and effective while fine-tuning policies when appropriate," state television cited Xi as telling the meeting,' CNBC reported. "China will make more efforts on expanding domestic demand and fostering new consumption growth areas."

Xi was cited in numerous press reports saying that market forces would be given more scope to determine commodity prices and the central government policies would emphasize urbanization. “The political bureau urged more efforts to boost domestic demand and increase stable investment next year to bolster the economy,” China Daily wrote.

Local investors quickly bought up companies that would benefit from additional stimulus spending. “Cement producers were the day's biggest gainers, with the entire board jumping 7.98 percent. Fujian Cement Inc and Jiangxi Wanniangqing Cement Co rose by the 10-percent daily limit to close at 5.9 yuan per share and 11.28 yuan per share, respectively,” China Daily said.

Another reason for Wednesday's sharp rally was that most Chinese investors had capitulated on equities. “Chinese stock investors emptied trading accounts at the fastest pace in 16 months last week, three days before the benchmark Shanghai Composite Index (SHCOMP) rallied the most in three months,” Bloomberg Businessweek reported.

“The number of Chinese stock accounts containing funds dropped by 205,000 to 55.6 million, the largest decline since the week ended July 8, 2011, according to regulatory data compiled by Bloomberg. The number of funded accounts slid to the lowest level since the week through Nov. 26, 2010, after reaching a high of 57.28 million in June 2011. About 112 million accounts are empty or frozen, the data show.”

This fits into a call on the Chinese market made by renowned technical analyst Tom DeMark earlier this week. “Everyone is negative on SHCOMP index, absolutely everyone,” DeMark wrote in an e-mail cited by Bloomberg. “And now is the perfect environment to make a low and be positive as the last seller, figuratively speaking, has sold.”

“Both DeMark's Sequential and Combo indicators completed ‘13 countdown' on a daily basis for the Shanghai index last month,” Bloomberg wrote. “In general, DeMark's ‘countdown' study involves comparing a security's closing price to its highest or lowest levels two periods earlier, with cycles of ‘exhaustion' forming when a pattern continues 13 times.”

“I believe SHCOMP index made a low and should have a very strong rally for a number of months,” DeMark wrote in the email quoted by Bloomberg.

Although most investors welcomed the rally, there is still a great deal of skepticism about its longevity. The Wall Street Journal commented, “Investors will be keenly watching the Central Economic Work Conference, an annual meeting of top policy makers, which will detail a 2013 growth target and a broad economic agenda for the coming year, analysts said. The conference is expected to be held in the coming weeks or days.”

Investors who want to trade the rally in China could buy the iShares FTSE China 25 Index Fund (NYSE: FXI). FXI gapped up at the open in New York trading on Wednesday and, at mid-afternoon, is trading up more than 3.5% at 38.36. The price has moved above the 500-day simple moving average (38.24), which proved to be impenetrable resistance back in February and March.

If FXI closes above the 500-day simple moving average today and, more important continues to rally on Thursday, it could be a sign that the rally in China is real. There is additional resistance at the 200-week simple moving average (38.91) but a breakout above the 39 level could well mean a rally up toward the 2011 high of 46.25.

Posted-In: Long Ideas News Movers & Shakers Global Trading Ideas General Best of Benzinga

 

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