Chinese stocks have staged a notable recovery in recent sessions, buoyed by speculations of potential government interventions to bolster the struggling market. On Thursday, an analyst suggested that a bullish upswing might be on the horizon, basing his assessment on technical indicators and market data.
What Happened: Adam Turnquist, LPL’s Chief Technical Strategist, remarked, “Technical indicators are showing signs of a potential turnaround in Chinese equity markets.”
Positive Technical Trends: Turnquist pointed to the China Shanghai Composite Index, which has rebounded since the lows observed in March 2020 amid the onset of the COVID-19 pandemic. Supporting his observation, he highlighted the emergence of a doji candlestick pattern, coupled with a bullish divergence in the relative strength index and increased trading volume.
According to Turnquist, a breakout above the resistance level at 2,910 could mark a reversal in the downtrend, signaling the sustainability of the market’s recovery.
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Extreme Oversold Conditions: Turnquist noted that the percentage of stocks currently in oversold territory, indicated by an RSI reading below 30, along with the proportion of stocks hitting new 52-week lows, has surpassed the 70% threshold.
“Historically, readings of this magnitude have overlapped with major market bottoms,” the analyst said. “A ramp in new four-week highs following extremely oversold momentum has often overlapped with major turning points on the SSE Index.”
ETF Inflow Surges: Turnquist also noted that the inflows into Mainland ETFs have surged. “Markets stop panicking when policymakers start to panic,” he said, as he noted that there has been continuous news flow on additional stimulus measures from Beijing.
Turnquist sounded out a note of caution. “Identifying market bottoms is a difficult challenge riddled with risks, especially in China given the degree of government policy influence over price action,” he said.
“Moreover, economic conditions have yet to materially improve, although if/when they do, stocks will likely be well ahead of it.”
Why It’s Important: China, the world’s second-largest economy, is a key vehicle of global growth, especially given the country’s manufacturing prowess. For many of the big techs, the country serves as a major market as well as a supplier. “When China sneezes, the world catches cold,” is an adage that underlines the importance of the country.
A recent Centre for Economics and Business Research study said China may rise to become the world's top economy by GDP as soon as 2037. Diane Rulke, a Carnegie-Mellon University professor said, “China accounts for about 30% of global manufacturing output; it contributes about 22% of global GDP growth; people should want to invest there, but instead they’re walking away rapidly,” according to Reuters.
“The idea of a recovery by [the] Chinese market is positive for the U.S. investors,” she added.
American investors look toward China as a profitable trading opportunity. The net U.S. investment inflow into Chinese stocks and bonds was a positive $17 billion in 2018, which rose to $36 billion in 2020 before moderating to $20 billion in 2021, a Forbes report said. This reversed to a net outflow in 2023 as the domestic economy showed signs of cracking under the pressure of a collapsing property market and other headwinds.
A recovery by Chinese stocks could also mean Alibaba Group Holdings Ltd. (NYSE:BABA), Baidu, Inc. (NASDAQ:BIDU), JD.com, Inc. (NASDAQ:JD) and other U.S.-listed Chinese stocks turn profitable trades for their holders.
Turnquist’s view could be put to test when the Chinese stock market reopen on Feb. 19 after a weeklong New Year holiday.
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