Contents
In recent sessions, Chinese stocks have displayed a notable recovery, fueled by speculations of forthcoming government interventions to support the struggling market. Analysts are now pointing to several promising signs indicating a potential turnaround in China’s stock market.
Highlights:
- several technical indicators suggesting a potential reversal in the downtrend of the Chinese stock market. These include the rebound from March 2020 lows, bullish candlestick patterns, and increased trading volume.
- A significant portion of Chinese stocks are currently in oversold territory, historically a marker of potential market bottoms. This, coupled with surging new highs, suggests a possible turning point for the Shanghai Stock Exchange (SSE) Index.
- China’s economic importance makes its stock market recovery crucial for global growth. US investors could benefit from this potential turnaround through investments in US-listed Chinese companies like Alibaba, Baidu, and JD.com.
China’s Stock Market: Positive Technical Trends
Adam Turnquist, LPL’s Chief Technical Strategist, highlighted the China Shanghai Composite Index’s rebound since the lows of March 2020, noting a bullish doji candlestick pattern, a bullish divergence in the relative strength index, and increased trading volume. He emphasized that a breakout above the resistance level at 2,910 could signal a reversal in the downtrend, suggesting the sustainability of the market’s recovery.
Extreme Oversold Conditions
Turnquist pointed out that a significant percentage of stocks are currently in oversold territory, with an RSI reading below 30, surpassing the 70% threshold. Historically, such readings have coincided with major market bottoms. He also noted a surge in new four-week highs following extremely oversold momentum, often indicating major turning points on the SSE Index.
ETF Inflow Surges
Turnquist observed a surge in inflows into Mainland ETFs, suggesting that markets may stabilize as policymakers respond with additional stimulus measures. However, he cautioned that identifying market bottoms, especially in China with significant government policy influence, is challenging and carries risks.
Importance of China’s Stock Market
China, as the world’s second-largest economy, holds significant importance for global growth and trade. A recent study suggests China may become the world’s top economy by GDP as soon as 2037. The recovery of the Chinese market is particularly crucial for U.S. investors, given China’s role as a major market and supplier. The adage “When China sneezes, the world catches cold” underscores this importance.
Potential Impact on U.S. Investors
A recovery in Chinese stocks could benefit U.S. investors, offering profitable trading opportunities in U.S.-listed Chinese stocks such as Alibaba Group Holdings Ltd., Baidu, JD.com, Inc., among others. This sentiment is significant, especially considering the net investment inflow from the U.S. into Chinese stocks and bonds in recent years.
Conclusion
Adam Turnquist’s optimistic view on the potential turnaround of China’s stock market highlights positive technical trends, extreme oversold conditions, and surging ETF inflows. While caution is warranted due to the influence of government policies and ongoing economic challenges, a recovery in the Chinese market could have far-reaching implications for global investors, particularly those in the U.S.
