The Average Chinese Stock is Still in a Bull Market $FXI $HAO

June 16th, 2010 § 0

Well I guess that headline puts the cat amongst the pigeons! Yes it is well publicized that the Shanghai Composite has entered a bear market. Looking at the chart below me cannot disagree. In fact I don’t know if there are any market technicians who would disagree with this assertion. But is the Chinese stock market in a bear market?

Shanghai Composite

There is more to reading the market than merely looking at a market cap index. As far as I am concerned a bull market is a “condition” “theme” (call it what you will) that lifts all stocks, that is, a bull market is where the “average listed stock” is engaged in an up trend (an up trend can roughly be defined as a series of higher highs and higher lows).

Market cap indices do a rather bad job at depicting the behaviour of the average listed stock because over 80% of their performance is accounted for by less than 20% of the members (well something like that). As an individual investor why should I place more emphasis on the behaviour of GE than say Colt Firearms? If I took my monkey and told him to choose 30 stocks out of a universe of NYSE listed companies (I think there are about 2500) what would this portfolio look like? Well it would not look anything like the Dow or the S&P 500! Yet everyone is obsessed at analysing the behaviour of the major market indices! This is why we like to use equally weighted indices to gauge the behaviour of the average stock or should we say the broad market.

OK getting back to China…….what if we took all the components of the Shanghai Composite and equally weighted them. What would the market for the average Chinese stock look like then? Well look at the chart below, it is just that – a Chinese version of the US Value Line Index! Now beauty is in the eye of the beholder, reconciling the Shanghai Comp and the Equally Weighted Chinese “Comp” reveals that the average listed Chinese stock is not looking so sick after all, at least not any sicker than the average European or US listed stock. I will go so far to say that because the average listed Chinese stock has not made a lower low the Chinese stock market is still engaged in a bull market!

Shanghai Comp (components equally weighted)

OK this is not to say that the average listed stock in China is not going to register a lower low over the coming weeks. But a bull market is a bull market until it isn’t. I guess there is an old Chinese proverb that says: judge a man by his actions not words. We judge a market by its actions not the words of analysts/commentators or “news reporters”.