Trading Nation

Don’t buy Chinese stocks with ‘worst enemy’s money’

The next move for Chinese stocks
Mega-cap value destruction
Trading Nation: Can the rally continue?

After a stunning plummet earlier in the year, Chinese stocks are again on the rise, with the Shanghai composite up more than 18 percent this quarter. But one investor still says that he's staying away at all costs.

"I wouldn't use my worst enemy's money to buy these stocks. We would avoid China altogether," said Chad Morganlander, portfolio manager at Stifel Nicolaus' Washington Crossing Advisors.

On CNBC's "Trading Nation" on Friday, Morganlander listed several reasons why investing in Chinese stocks may be dangerous, including decelerating economic growth, high levels of debt and rising valuations. Trouble in China could translate into U.S. equities as well in 2016, he said.

"We think that the Chinese economy is going to be a major anchor for global growth in 2016," Morganlander said. "And that will be dragging down valuations or at least keeping valuations across the board on the S&P as well."

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Despite the Shanghai composite's recent rally, stocks have yet to fully recoup losses from the summer swoon. The index is down more than 22 percent over the past six months.

However, technician Craig Johnson of Piper Jaffray said if Chinese stocks can break through one key technical level, they may take off again. Johnson is watching the 40-week moving average for the Shanghai composite, which comes in around 3,800.

"If we do that in the next several weeks in here, that's going to be a very bullish sign not only for Chinese markets but certainly for global equities, and would certainly be a strong underpinning for global markets," Johnson said Friday.

The Shanghai composite closed down slightly on Monday at 3,610. Another 5 percent gain to 3,800 would be a technical confirmation of this quarter's strong bounce, Johnson said.

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