China Update – 12/25/2015

There has been a noteworthy rally in the Shanghai Composite Index since the August low, but I am not ready to call a bull market yet. In July, I wrote that historically, Chinese bear markets have either entailed a ~50% drop with subdivision, or a ~70% drop without subdivision. As of the August low, the Shanghai index was down 45% with no obvious subdivision on the monthly chart. Thus, I think there is a high risk that the current rally is only a bear market rally. Furthermore, in previous Chinese bear markets, there were bear market rallies of duration similar to what we are seeing now. On the chart below, green arrows are pointing to those rallies.

china rally dec 2015

As for what a continued bear market in China would mean for the U.S. markets, the periods of 2003-2005 and 2009-2013 show that it is possible for the U.S. to trend higher even if China is trending down. However, despite trending higher, the U.S. stock market had some lengthy sideways movement during 2004-05 and 2010-2012 was a volatile period. So, if China is still in a bear market, next year could be bumpy for the U.S. despite an overall uptrend.

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