China, do we mark the destination?

Last Monday, the Shanghai Composite Index was off alarms when yielding 5.07% and closing below the resistance of 2,665 points, reaching the minimum of 7 months. This drop reflects the nerves and fears of Chinese investors to the possible rise in interest rates of the Central Bank of China in order to cool the housing bubble that appears to be forming in the Asian giant and inflationary pressure.

Yet despite the doubts about the future of the economies of the eurozone for now the American economy is to settle this episode with a correction in its main indices not away him from the upward trend, supported by good corporate results and improvement in its main economic indicators.

In a scenario in which some of its main actors begin to lose steam inevitably ask the question: Is it possible to attend the global economic recovery without the contribution of China?

Let ‘s see technical information at our fingertips if we can give clues to what may happen. For this we look at the evolution of the Shanghai Composite (red) index and compare it to the SP500 (blue) in the following graph:

If we analyze the chart since May 2008, the first thing that strikes us is the anticipation of the Chinese index, which bottomed out and began the recovery four months before European and American bags, and immediately realize that it has been unable to reach new heights since August 2009, while the SP500 has continued to set new highs until the end of April. We arrived at this point: this is a leading indicator or may still different paths?

We try to answer another exercise that can bring us more clues. We will do ETFs that follow the respective indices: FXI (iShares FTSE China 25 Index Fund) and SPY (SPDR S & P 500 Index), analyzing the degree of correlation since October 2008, the date when the Shanghai Composite marked mínimos- up today. We will use the following correlation graph 20 days ETFreplay provides:

 

We note that the correlation to 20 days has ranged from a maximum of 95% and at least 50%, but most of the time the state above 75%, which area is now. Thus, the technical data show us the most likely thesis that the path described by one will be the script for the other, and in this case who rules the roost is the Chinese index.

If it were true that conclusion, it goes without saying that the fall of the Shanghai Composite last Monday and if maintained can be really disturbing.

What should we do?

In this situation should exercise extreme caution with the purchased equity positions we have open and think of a strategy to take advantage of the possible correction of the indices. We expect to run the same only if the break key supports are confirmed and FXI could be an interesting instrument.

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