"Bull in a China Shop" Revisited, Plus Some Interesting Chinese ETFs

• Shanghai is Outperforming the US
• Interesting Chinese Sectors

Shanghai is Outperforming the US

Back in early January, I drew your attention to the fact that the Shanghai Composite ($SSEC) had broken to the upside, which is shown in Chart 1. A week or so later, when the coronavirus reared its ugly head, Chinese equities sold off, rendering that nice-looking breakout a whipsaw. Quite often, when a false breakout such as this develops, traders scramble to get back on to the right side of the market, resulting in an above-average move in the opposite direction of the whipsaw. The Index did sell off sharply, but only for a couple of weeks, after which a sharp rally developed. Now, following a small retracement move, the Shanghai Composite seems to have regrouped; it is once again slightly below the original breakout point, almost as if nothing had happened! If the Chinese market had wanted to experience more of a bear move, I think it should have happened by now.

Chart 1

Chart 2 includes the S&P Composite, where the convincing Chinese retracement move can be better appreciated. Looking back, a stronger US performance developed prior to the health crisis. Since the crisis began, though, it has been China that has taken the lead.  However, this relationship does not take currency fluctuations into consideration. The bottom window of the chart does, and here the comparison is even more strongly in favor of China. The series is a relative strength line for the Deutsche-X-Trackers Harvest 300 China A Share ETF (ASHR) against the S&P Composite. The ASHR is a close, but not identical, replication of the Shanghai Composite. Last week saw a decisive break above both down trendlines. That suggests that the superior performance of Chinese equities against the US has only just begun.

Chart 2

When we look at a chart for the ASHR itself, it seems that it is poised to move higher. If that's the case, it's likely to happen pretty soon. At the moment, the price is just below its 2016-20 down trendline, with the dashed horizontal line marking the top of a potential base. I find it intriguing that this epicenter of the coronavirus crisis is able to support a far stronger stock market than experienced in the US. It could be argued that the US market is looking ahead and discounting an economic armageddon to be later caused as the virus spreads, meaning that's why it is down.

Chart 3

My own view is that if the Chinese market is actually rising because it believes that the outbreak has been contained. If China can contain it, it may not be as virulent as everyone thinks and is therefore likely to be controlled elsewhere.

I can hear you saying that the Chinese government is holding up the market and, therefore, the rally is questionable. There may be some truth in that statement, but if you look at the Shenzhen A Share Index, or the Chinext Index (China's version of the NASDAQ), you will see that they are ahead of the Shanghai Composite and are already at post 2019 highs.

The Chinext ETF (CNXT) is plotted in Chart 4. I think it's more likely that the government would support large-cap stocks rather than the smaller cap stocks on the Shenzhen exchange. All of which makes me suspicious that the recent US market retreat is less about the virus and more about prices having got ahead of themselves and therefore in need of some corrective action.

Chart 4

Interesting Chinese Sectors

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In that respect, there are some Chinese sector ETFs that look set to move higher once they clear certain benchmarks. All these charts have been plotted with the same template, which offers a longer-term view of the overall technical situation. The upper two windows plot the price and its long-term KST, whereas the lower two achieve the same objective, but for the relative action against the S&P.

We start off with the consumer sector in the form of the Global X China Consumer ETF (CHIQ). The price is currently just slightly above its breakout level. The RS line is right at resistance. Since both KSTs are in a rising mode, it seems reasonable for the price and RS to move higher as well.

Chart 5

Chart 6 shows the Krane Shares CSI China Internet ETF (KWEB). In this instance, both series have already broken to the upside, the RS line less so. It's also worth noting that each series is also trading above s 65-week EMA. The chart also reveals two rising long-term KSTs.

Chart 6

The Invesco China Technology ETF also looks interesting, because it has experienced an absolute and relative breakout, again supported by a positive KST.

Chart 7

Finally, Chart 8 shows us that the Global X China Materials ETF (CHIM) is very close to an upside breakout. Both KSTs are in a positive mode and the RS line has already moved decisively above its 1 ½-year down trendline.

Chart 8

Good luck and good charting,

Martin J. Pring

The views expressed in this article are those of the author and do not necessarily reflect the position or opinion of Pring Turner Capital Groupof Walnut Creek or its affiliates.