Friday, December 2, 2011

Chinese and U.S. Relative Strength

China may be sporting a 9.1% Year over Year Real GDP, but the stock market certainly does not reflect that strength. The chart below displays the S&P 500, which is the green line in the top chart, and the Chinese Stock market measured through FXI ETF, which is the red line in the top chart. It also shows the relative strength of the S&P 500 measured against China. When the line is falling, the Chinese stock market is performing worse than the U.S. stock market.

There are a few things to point out on this chart. First, the Chinese stock market has been underperforming the U.S. stock market since July 2009 (as marked by the light blue lines). Second, the Chinese stock market has created a new downtrend channel, which means it is underperforming by an even larger margin since the beginning of the year. I have marked this with the red lines.

Finally, the red, downtrend channel has provided traders with nice buy and sell signals. I have focused on the sell signals which I marked with the vertical black lines in the chart. When the relative strength line hits the upper red line, it has marked a good selling opportunity for traders. With the recent policy intervention by the global central banks, we are once again seeing the relative strength line rising to that red line. I will be watching this over the next few days to see if it once again portends a good selling opportunity.