Thursday, January 10, 2013

With the Shanghai Composite up 16.5% From the Lows, How High Can it Fly

A lot.
After hitting a multi-year low of 1959.77 on Dec. 3 the index closed last night at 2,283.66, a nifty little move.
Here's our December 5 post:
Dramatic Countertrend Rally in Shanghai
In down-trending markets the reversals can be dramatic as the herd pulls the plug on short positions and, combined with selling exhaustion, results in 2-3-4% up-moves.
The tricky bit is judging whether these moves signal a change in direction or not. Both the 1982 and the 2009 Bull Markets began with dramatic jumps, as we saw in our May post discussing the Death of Equities:

The market bottomed at 776.92 on Thursday August 12th, 1982 and started moving fast:

Aug. 13 788.05

Aug. 16 792.43
Aug. 17 831.24
Aug. 18 829.43
Aug. 19 838.57
Aug. 20 869.29
Aug. 23 891.17

Just like that, 14.70% in seven trading days.It is also reminiscent of the current run off the Monday March 9, 2009 bottom of 6,547.05.

Four consecutive up days ending at 7,223.98 for a 10.33% pop.... 
The idea that markets (as opposed to individual issues) bottom by flatlining across the bottom is not one to make a bet on.

In the last couple weeks we've seen some positive forecasts:
Top Ranked Base Metals Forecaster: China Will Turn the Corner
Major Commodity Trader Sees China Turnaround
But the proof will play out over the next ten trading days. Back on September 7 the Shanghai popped 3.7% on news out of Beijing that there was more stimulus a-comin' but then resumed the long decline, hitting post-crisis lows in the last few trading sessions....
The next ten trading days saw a run from 2,031.91 to 2,168.35, 6.3%.
Here's the latest from Market Anthropology:
The Dragon meets The Snake 
 About a month ago, after hearing of Tom Demark's call on the Shanghai - I built a comparative of the SPX decline into the historic August 1982 springboard low. 

Five weeks later, it has both held the downside pivot and the steep retracement trajectory of the rally.  

And while I am skeptical of the retracement rally's sustainability - it will be another comparative added to the weekly updates. ...MORE
Here is Mr. DeMark's Shanghai call via Bloomberg, Dec. 3, 2012:
DeMark Sees China Index Rally as Bears Exhausted Below 1,960
The Shanghai Composite Index (SHCOMP) will rally 48 percent within nine months after its decline below 1,960 signaled selling has climaxed, according to Tom DeMark, the creator of indicators to show turning points in securities.

The benchmark index for Chinese equities will advance to 2,900 after its decline produced a buy signal on the Sequential and Combo charts, designed to identify market tops and bottoms, said DeMark, who has spent more than 40 years developing market- timing indicators. The Shanghai index rose 0.8 percent to 1,975.14 at today’s close after earlier falling to the lowest level since January 2009. It’s down 10 percent in 2012....MORE
Also at Bloomberg:
DeMark Sees S&P 500 Falling 5.5% After Peak Near 1,500