Chinese Stocks are a Wonderful Value Trap

When it comes to properly assessing China’s stock market, are financial experts bad or just blind? Here’s what they’ve been saying:

Buck the Trend, Buy Chinese Stocks – Forbes, Jim Oberweis, 7/9/13

Huge Reforms in China Could Lead to Big Upside for Top Chinese Stocks – 247wallst, 11/19/13

It’s Time to Buy China – MarketWatch, Jeff Reeves, 11/11/13

Chinese Stocks: Huge Growth and Room for More  – Motley Fool, 11/18/13

While pundits continue trumpeting Chinese stocks and “cheap valuations” as a buying opportunity, we’ve alerted our readers and subscribers to do the exact opposite. Our dashboard of indicators have and are being confirmed by bearish price action. Simply put, the economic climate in China, along with its BRIC (NYSEARCA:BKF) peers, is deteriorating and Chinese stocks (NYSEARCA:GXC) will get worse before they get better.

After issuing a 12/6/13 buy alert on ProShares UltraShort FTSE China 25 ETF (NYSSEARCA:FXP) at $58.60, the ETF Profit Strategy wrote: (FXP aims for double daily opposite performance to large-cap Chinese stocks.)

“From our vantage point, the prudent investor has two better choices: 1) Aggressively short Chinese equities, or 2) Aggressively avoid them. Right now, market prices are saying the Chinese stock market will get worse before it gets better. That means if you’re the least bit bullish on Chinese stocks, you best wait for lower prices before plowing in for the long-run.”

On Feb. 10, we sold the final leg of FXP at $75.50 for a blended two-month gain of 23.5% and our still open tandem options trade is now up 62% since our 1/9/14 entry. The short China (NYSEARCA:YANG) trade has been the right place for traders.

FXI Short Chart 3.17.14

The People’s Bank of China is trying to keep its real estate market (NYSEARCA:TAO) and financial system from imploding. The PBOC has resorted to novice tactics like making Saturday night announcements – while people are out of the office – that it will peg the yuan to a range of 2% above or below a daily rate versus the U.S. dollar.  Press releases issued on the weekend are the first thing that 22-year old PR interns learn.

China is a global leader in bribery and corruption and it now ranks 80th among 177 countries, according to the 2013 Corruption Perceptions Index. With an embarrassing score of just 40 on a scale of 0-100, China ranked lower than Brazil, India, Russia, Turkey, and even Venezuela. Only Central Asian “Stans” and Sub-Saharan Africa outpace China in brazen fraud.

The upcoming Alibaba IPO which is expected to give the Chinese-based e-commerce giant a $140 billion market cap, is just another well-crafted distraction.

China’s unfolding credit crisis has yet to hit full stride and there’s scant evidence of capitulation selling in Chinese stocks (NYSEARCA:FXI), which would be the sign of an imminent bottom. For patient and opportunistic investors an opportunity to go long China will arrive – but not until stock prices have first hit their “margin of safety” zone. Are we there yet?

The Shanghai Composite over the past four years shows a descending chart pattern of lower highs. Although the downtrend subsided when the index hit 2000, each of the last three bounces has resulted in a lower high with the downtrend performance still intact.

The ETF Profit Strategy Newsletter follows China along with other key asset classes using technical, fundamental, and sentiment analysis along with market history and common sense to keep investors on the right side of the market.  In 2013, 70% of our weekly ETF picks were gainers.

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