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Should you Have Money in Chinese Stocks or ETFs?

Chad Karnes

The Chinese stock marketis down over 40% from its price highs in 2009.  Is it now finallytime to put money into China and Emerging Market ETFs?

"All warfare is based ondeception", the Chinese philosopher Sun Tzu said in his 'Art of War'.  This quote seems very appropriate given theexperience I have had researching Chinese (FXI - News) and Emerging MarketETFs (EEM - News).

The Powerof Google

This morning I did asimple Google (GOOG - News) news search for the past week on "China Economy".  Out of 14 results, a surprising 12 were verypositive in nature; one was neutral and only one was negative (and found nearthe bottom of the page).  One of those headlines is below & captures the overall sentiment.

"Six Reasons why China'sEconomy has Bottomed Out and Two ETFs to Consider" -CNBC Marketwatch 11/8

It is perplexing to me tohave such a resounding amount of positively skewed Chinese articles, especiallygiven the reality of the situation.  On8/17 in the ETF Profit Strategy Newsletter we noticed a similar media skew tothe positive side of China's growth which along with technical analysis alertedus of a high probability trade setup. 

The More Things Change the More they Stay theSame

On 8/17 with the ShanghaiComposite Index (000001.SS - News) at 2,136, we alerted "Chinacontinues to be the media darling as their economy is still the world's"fastest growing", despite experiencing six consecutive quarters of slowergrowth.  Looking at a stock chart, onewould never know China was in better shape than most of the other majorcountries in the world.  It has been in abear market since 2009 and is down over 35% from that peak".    

Below is the chart thatwas included in that update along with more commentary that "quite often fundamentalsand economics have very little to do with actual stock price behavior.  Thereis no sign of letting up as price recently broke down from a 3 year low and nowtargets the 2008 lows".

For a larger chart click here

China Today

Since August's excessive mediabullishness, the Shanghai Index has fallen another 6% now down to 2,000. 

If you had followed the media's advice thenyou would be down significantly since August. The attached chart shows just how bad that trade has been. 

Again today, the media continuesto love China with virtually every news headline positive (GXC - News).  The media is still bullish after 3 months ofcontinued price deterioration.

To add insult to injury, thelone negative google search article on China's economy wasn't even from the United States, itwas from the United Kingdom!  "China'seconomic destiny in doubt after leadership shock", the British Guardian counterargues. 

Is the fact the lone negativereview from Europe, relevant?  Who knows,but it certainly sheds some light on the group think and spin trap UnitedStates media companies can fall into. 

The uber-bullish media alsohelps support why the China long likely continues to be a bad trade.  For more on using contrarianism to supporttechnical and fundamental analysis click here.

Your ETF has How Much China???

China's performance maynot interest you, but many of the more popular ETFs which aim to diversify yourportfolio, contain a very large portion of Chinese stocks and thus have likely underperformed because of it. 

The third largest exchange traded product, the iShares Emerging Markets ETF (EEM - News) has 18% ofits holdings from China.  This percentageskyrockets if you include all of the Asian exposure as the data below fromiShares shows.  Brazil, Russia, andMexico are the only non-Asia countries in the top 88% of the EEM index holdings.

China Tomorrow

Given the media's stillextremely skewed outlook on China and the technical analysis supportingthe downside, it likely is too early to go long Chinese and Emerging MarketETPs such as the Direxion3x Levered Emerging Markets Bull  (EDC - News) or the Vanguard EmergingMarket VIPERs (VWO - News). 

A breakdown of key shortterm support would also set up another high probability sell setup.  The 2,000 price level is very important andneeds to hold or the 2008 low of 1700 is the next likely target.  Some short ETFs that can be used to takeadvantage of the extreme bullishness and technical setup of China when the timecomes are the ProShares Short China (YXI - News) or the Direxion 3x leveredETP (YANG - News).

The ETF Profit Strategy Newsletteridentifies important support/resistance levels and combines them with commonsense technical analysis to provide a short, mid, and long-term forecast alongwith actionable buy/sell recommendations.

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