October 18,2010

Shanghai's Seven-day Rally: a Bull Start Running?

By Hong Hao,Beijing

Beijing to New York, from London to Amsterdam, we are traveling to see our clients. The mood is hopeful. "Oh, you are that guy calling for a fourth-quarter rally - nice," our meetings usually opened as such, "but how much upside from here"? It is an important question to answer at this juncture.


Our analysis shows that a seven-day consecutive rally is a rare occurrence and bears the hallmark of a bull market. Since 1998, it has only happened ~1% of the time. More importantly, almost all such rallies clustered during a major market uptrend after the Shanghai Composite pierced through its 200-day moving average. Last week's gain of 8.5% is also rare, only occurring less than 3% of the time, and is the 19th largest weekly gain since 1998. Our analysis shows that if such significant weekly gains occurred during when the index was above its 200-day moving average, the median return was 9.4% with a win ratio of 81% in eight weeks, and 17.4% with a win ratio of 75% in twenty weeks. As such, this rally has further to run in the coming months, if history is a guide.


Meanwhile, our CICC "The Crowd" Sentiment Index, both short-term and long-term and with an impeccable track record spotting the various important trend reversals so far this year, continues to be stuck in neutral, reflecting the aforementioned healthy dose of investors' reservation. Furthermore, recent monetary statistics showing that M2 is growing at 19% YoY, compared to the government's target of 17% for 2010, and loan growth was ~18% above expectation, as predicted by our China Credit Cycle Index. A bear market tends to end on bad news. And in a bull market, we buy on dips.


(The Author is a market strategist at CICC.)



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