Inspecting China

October 22nd, 2012

by Chris Kimble

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Over the last two years the Shanghai Composite has underperformed the S&P 500 by almost 50%.

The underperformance of the world's second largest economy presents more than a handful of concerns the global economy. However, on a shorter term basis the Shanghai Index (SSE) and China ETF (FXI) have been pushing above their two year falling resistance lines in the chart below at (1). Both reflected relative strength last week and over the past month compared to the S&P 500 index (see relative strength post here).

Premium members bought FXI on its support line around a month ago and are protecting gains with a trailing stop. This break above falling resistance is a positive at this time for China, and FXI and could be sending some positive clues about the Chinese economy.

Odds are high that growth in China would be good for global economies. When constructing a portfolio based on the "buying low and sell high" strategy, a 50% underperformance in the past two years might be a good reason to "inspect" the situation taking place in China right now.

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