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The Trend is your friend (or enemy)

By Jim Trippon

We’re sticking with the old saying “the trend is your friend” as we wait for Chinese investors to get over a bad case of nerves. Shanghai's stock market has now dropped to a five-week low, breaching below the 3,000-point mark. Sources in China and the U.S. agree about the reasons. There are nagging ongoing concerns that China’s economic stimulus measures will be tightened up in the near future to curb inflation risks.

In Monday’s trading, the key Shanghai Composite Index lost 1.21 percent, or 36.47 points, to close at 2,976.94. Turnover was $11 billion.

At the China Stock Digest we deal mainly with ADRs (American Depositary Receipts) which act as proxies for stocks in Chinese companies. ADRs can be pushed and pulled in several ways. Large cap ADRs such as China Mobile (CHL) tend to move in rough tandem with major trends on America’s leading market indexes like the S&P 500. But internal developments can also affect the stock price.

Movements of the Shanghai and Shenzhen exchanges are also influential. That’s especially true since the U.S. economic implosion and China’s relatively rapid recovery. This has enhanced a tendency for Chinese ADRs to move less synchronously with U.S. indexes.

The five-week wobble on the Shanghai Stock Exchange has created a downtrend which has not yet found a clear bottom. To borrow another catchphrase, now is not the time to catch a falling knife.

As long as the trend in Shanghai is on a downward slope, we won’t fight it. Even the best Chinese stocks are coming under pressure as a result of the Shanghai trend and weak leadership from New York markets.

That means we continue to take a very conservative view towards any new stock purchases. Until the trend becomes the investor’s friend again, we’ll maintain our cautious stance.

Premier Wen Jiabao said on Sunday that the government would strike a balance of economic growth, adjust economic development model and manage inflation expectations this year.

Jim Trippon,

China Stock Digest Editor-in-chief

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