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The World's Biggest Downtrend

By Tom Dyson, editor, S&A Penny Trends
Monday, February 1, 2010

I'm shorting China.
 
China is the world's largest, most liquid emerging market... and the main engine of global trade. This makes its stock market a kind of benchmark for riskier investments.
 
I track Chinese stocks with the iShares China exchange-traded fund (FXI). This fund just reached its lowest point in over six months. But the chart gets even worse when you look under the hood...
 
 
 
Take a look at the middle window in the chart above. These bars represent trading volume. The tall red bars on the right edge mean huge trading volume is accompanying the pullback in price. Big money is pulling out of FXI.
 
Now look at the relative strength index (RSI) on the bottom. The RSI is like a heart-rate monitor for a stock market. It's displaying a series of lower highs and lower lows. This means FXI's upward momentum is exhausted.
 
While Americans have consumed too much and produced too little, the Chinese have fallen into the opposite trap. They've built too many factories, office buildings, highways, railroad stations, and power plants. Now, the West can't afford their products. There's going to be a huge adjustment and liquidation in China.
 
The Chinese government is trying to cover up this problem by spending more money and stimulating the economy with easy credit. The Chinese stock market soared 160% between November 2008 and November 2009 on the back of this stimulus.
 
But this approach has only made the problem worse...
 
According to Jim Chanos, a billionaire hedge-fund manager and prominent China bear, the Chinese are currently building so much commercial real estate, they could accommodate every person in China with a 5'x5' office cubicle when construction is complete.
 
Now China has one of the largest investment bubbles in the world. When the adjustment comes, it's going to turn the Chinese economy into a business slaughterhouse. Looking at the chart above, we may be at this point now.
 
That's why shorting China is a low-risk, high-reward bet. As we say in Penny Trends, it's like throwing rocks into a wet paper bag.
 
Good trading,
 
Tom




In The Daily Crux
Market Notes
Euro PLUNGE continues... euro ETF breaks down to seven-month low.
 
Brazil fund EWZ slides 12% in January.
 
Sugar ETF surges to new high... up 55% in last six months.
 
Earnings today... ExxonMobil, Gannett, Humana, Plum Creek Timber.
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%