An Ace Up the Bull's Sleeve?

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Some of the hindrances to the bullish reversal in the global economy have been a slowing China and a slowing Europe. Luckily for the U.S., many of our recent tailwinds started back in September with a rise in the LEIs along with many of the other fundamental indicators we follow at PFS Group. The purchasing manager’s index (PMI) data last week for China was the first real sign of a possible reversal. The Shanghai responded very well when their markets opened again a week ago. The technical outlook has continued to shape up for the Shanghai Stock Exchange Composite Index through this week despite weakness in U.S. and European equities. A reversal and the establishment of a new bullish trend here would be an ace up the bull’s sleeve. With the market correcting on weak jobs data (actually, the stock market was pretty tired before that data – more on that later), a reversal in the Shanghai couldn’t have come at a better time.

Since early February, energy and material stocks have been underperforming on the wings of underwhelming Chinese economics and QE3 disappointment. Interestingly enough, this occurred amidst very accommodative moves from central banks globally such as another purchase program from the U.K., an aggressive purchase program from Japan, the second tranche of the ECB’s LTRO program, the Fed’s ZIRP pledge, and the second drop in reserve requirements from the PBOC since December. That’s a lot of inflationary fire power right there. Regardless of central bank accommodation, commodities and commodity stocks have followed the Shanghai index down in recent months. The correction kicked off on the Markit manufacturing PMI data mid-March that showed a decent drop versus estimates. The PMI data was estimated at 52.9 but it dropped down to 48.4 – a big disappointment. Anything below 50 denotes a contraction.

china crb
Source: Bloomberg

Last week’s NBS and the China Federation of Logistics and Purchasing PMI was released over the March 31st -April 1st weekend, just before a Chinese holiday that closed the Shanghai exchange for a few days. The data showed a rise from 51 in February to 53.1 in March – the fourth consecutive monthly improvement. In addition, the nonmanufacturing PMIs on Tuesday rose from 57.3 to 58. The Shanghai opened up strong after the holiday and the composite index rose 1.7%, the biggest advance since February 8. As I stated on the radio show last week, if prices stabilize here the Shanghai index could put in a higher low with the index up 4.7% last week, ytd. Last night’s trading gave this idea more credence, with the Shanghai up another 1.8% above last Thursday’s rally.

Technically speaking here, the Chinese stock market broke free of its 2011 downtrend in February. The manufacturing and nonmanufacturing data last week helped the index reverse at a very opportune time, just as the index was facing off with its old downtrend. Now that the daily chart has turned up again, the MACD is responding well, turning just shy of a buy signal last night. Near-term resistance is the 50-day moving average and the declining 150-day moving average right near 2365 and 2375, respectively. After that, we’ll need to deal with the 200-day moving average at 2450, which is decelerating from its decline. In that same area, we’ll be dealing with the November 2011 and the March 2012 highs. Once clear of those levels and the 200-day moving average, an uptrend would be official. For now, we have the makings of a bullish reversal.

shanghai bullish trend
Source: Bloomberg

Possible Head & Shoulder Bottom in Chinese Stocks

head shoulder bottom chinese stocks 
Source: Bloomberg 

Here are some other China econ data points the market is reacting to recently:

  • A Reuters report over last weekend claimed Chinese banks lent out over 900B, more than 800B expectations. The actual results on Thursday this week showed lending was 1.01T yuan for March.
  • CPI was a little hot this Monday, up 3.6% over a year ago. Consensus was for 3.4%. Food prices were the big culprit. Could hold the PBOC’s hand from another bank reserve cut.
  • China Trade data released on Tuesday showed exports were better than expected, up 8.9% over a year ago. Census was 7.0%. While imports were below estimates, they rose 5.3% over a year ago. This was on the heels of a huge February increase of 39.6% over a year ago.
    • Import data on commodities was weak in March following the huge increase in February. Oil down 1.4%, copper down 20.4%, aluminum down 36% and steel down 19.5% versus last month. So looks like some of the weak data was explained by February’s pull forward of demand.
    • A WSJ article Wednesday stated China is boosting its oil reserves again, importing 5.55M BPD in March, the third highest monthly increase on record.
  • According to Reuters, March auto sales at 1.4 million were an improvement to January and February sales, 1.16 million and 1.21 million respectively, showing a nice trend despite gasoline price hikes in March.

We get some big economic numbers soon on China (10pmET) including GDP, Industrial Production, and retail sales figures. This has definitely been two weeks chalk full of Chinese economic data. Now, you may wonder if Chinese accounting firms are fudging the numbers. Can’t a centrally controlled and censored society fudge their numbers? Well yes that’s true, but then they’d lose a lot of worldwide respect. In addition, the numbers have been bad up until lately, and they’ve been lowering their growth targets for the year (Wen this week). But let’s say for argument sake that they fudge their numbers. Francois Trahan of Wolfe Trahan estimated in January that the Chinese Shanghai would bottom in H1’12 based on other economies tied to China like South Korea. By tracking the relationship between early cyclicals in the KOSPI and Chinese stocks, he believed the chart below would signal a bottom in April. He basically advanced the chart forward twelve months for early cyclical stocks in the KOSPI. That points to a bottom mid-April. This is shaping up to be another good call on Francois’ part.

shanghai south korea
“2012 Portfolio Strategy Outlook”, January 3rd, with permission from Wolfe Trahan

Tomorrow will be a big day for Chinese stocks, and potentially the commodity stocks that did so well today. Will the GDP, IP, and retail sales figures disappoint? There’s a lot running on these figures with two very big up days for China in the last week. The technical reversal looks good, but we still have some resistance levels to break above before the all-clear can be signaled. And one month’s good economic data doesn’t make a trend. Trade data, auto sales, and PMI data look good as of late. Let’s see if China can make escape velocity. If it does, expect to see commodities rally and portfolio managers rotate into an under loved sector. Early cyclical stocks have outperformed in the United States for some time. A rising Chinese dragon has bullish implications for commodities and the global economy.

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About Ryan Puplava CMT