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The China Bubble Is Ready to Pop

By Jeff Clark
Thursday, January 7, 2010

The Chinese growth miracle is hogwash.
 
At least, that's the opinion of famed short seller Jim Chanos – who is most noted for uncovering the fundamental flaws with Enron. In a recent report put out by his hedge fund, Chanos compared the credit expansion in China to the U.S. subprime market and the housing boom before they went bust.
 
"It's Dubai times 1,000," he says.
 
Forbes has also joined the "bearish on China" party... A recent article points to "a speculative frenzy of borrowing" and "government bureaucracies foisting debt on state-owned business enterprises."
 
Nothing says "bubble" like a rapidly increasing pile of debt. And right now, there is no bigger credit excess than the Chinese market.
 
The Chinese stock market is a balloon looking for a pin. By the look of the following chart, it may be close to finding it...
 
 
 
The Shanghai Stock Exchange peaked in August and quickly fell 20% the next month. It has bounced higher since then, spending most of the past two months confined to a rather tight trading range. The blue lines on the chart show the support and resistance levels.
 
The red lines show a bigger picture and a much more powerful consolidating-triangle pattern. When a chart breaks up or down out of a consolidating-triangle pattern, the potential move is equal to the height of the triangle itself. On this chart, the top of the triangle is just above 3,400 and the bottom is at about 2,700. So the Shanghai stock market is poised to make an explosive move one way or the other.
 
Based on the negative divergence on the MACD, a momentum indicator we've discussed many times in Growth Stock Wire, the odds favor break to the downside.
 
Given that the chart is bouncing up into its resistance line, now seems like as good a time as any to sell China short. There's the potential for a huge move here. And if Jim Chanos and Forbes are right, there's a lot of money to be made as the China bubble pops.
 
Best regards and good trading,
 
Jeff Clark




In The Daily Crux
Market Notes
Mega building materials suppliers Valspar and Fastenal hit fresh highs.
 
Fertilizer producers surge... Mosaic, Agrium, Terra, and CF Industries make new highs.
 
New highs for medical device makers Medtronic, Varian, Stryker, and Zimmer.
 
Earnings today... Apollo Group, Constellation Brands, Lennar.
Market Watch
Symbol Price
Change
52-Wk
S&P 500 1221.53 +1.3% +10.1%
Oil 38.31 +1.4% -0.6%
Gold 138.07 +2.1% +16.3%
Silver 28.60 +2.4% +53.6%
US-Dollar 80.67 -0.8% +8.1%
Euro 1.32 +0.6% -12.1%
Volatility 18.01 -7.1% -19.8%
Gold Stocks 581.56 +3.0% +17.0%
10-Year Yield 3.02 +0.7% -10.7%

World ETFs
Symbol Price
Change
52-Wk
USA 122.89 +0.3% +11.3%
Canada 30.50 +0.2% +16.2%
Russia 21.94 +1.4% +18.1%
India 37.85 +0.3% +22.3%
Israel 16.69 +1.3% +10.8%
Japan 10.64 +0.6% +6.5%
Singapore 13.73 -1.1% +18.8%
Taiwan 14.78 +0.4% +19.2%
S. Korea 57.31 +1.3% +23.4%
S. Africa 71.87 +1.4% +28.2%
China 44.42 -1.4% -0.6%
Lat.America 53.17 +0.7% +8.4%

Sector ETFs
Symbol Price
Change
52-Wk
Oil Service 137.59 +1.0% +18.9%
Big Pharma 64.14 +0.0% -3.2%
Internet 72.07 -0.1% +23.4%
Semis 16.22 +1.2% +29.4%
Utilities 31.28 +0.2% +1.5%
Defense 18.52 +0.1% +10.6%
Nanotech 10.03 +0.4% +1.6%
Alt. Energy 10.08 +1.3% -3.3%
Water 18.49 +1.0% +14.5%
Insurance 16.14 +0.4% +21.1%
Biotech 20.54 -0.2% +28.1%
Retail 19.70 +0.3% +30.2%
Software 24.79 +0.8% +25.9%
Big Tech 53.87 +0.3% +22.7%
Construction 13.10 +0.9% +15.7%
Media 13.64 +0.5% +26.0%
Consumer Svcs 67.39 +0.2% +24.5%
Financials 55.04 +0.3% +7.4%
Health Care 64.30 +0.1% +2.0%
Industrials 63.54 +0.5% +21.0%
Basic Mat 74.35 +1.1% +25.3%
Real Estate 55.32 +0.1% +25.0%
Transportation 91.77 +0.7% +26.9%
Telecom 22.59 +0.5% +17.8%

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