Don't buy the market bounce: Data shows Chinese stocks hit hard by trade war may stay down

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The US-China escalation in trade tensions is bad for Chinese stocks too
Key Points
  • The U.S. and Chinese stock markets rebounded from the trade war plunge, with the Dow Jones Industrial Average closing up over 200 points on Tuesday and Chinese stocks up 2% on Wednesday.
  • Based on recent history, Chinese equities, which have been hit hard, may remain volatile for at least a month.

The trade war between the world's two largest economies is intensifying.

After President Trump raised tariffs on Chinese imports last week, China struck back in kind on Monday, raising its tariffs on some $60 billion worth of U.S. goods.

The situation was a lose-lose scenario to start the week, with U.S. stocks suffering their worst day since early January on Monday. The Dow Jones Industrial Average rebounded on Tuesday, up roughly 200 points. Stocks wavered on Wednesday with the Dow and S&P 500 opening lower but moving up after reports that the Trump administration would offer a six-month delay in auto tariffs.

Things could be more bleak from the Chinese stock market perspective. Chinese equities also experienced a bounce, up 2% on Wednesday, but it may not last long, according to a CNBC analysis of Kensho data.

The iShares China Large-Cap ETF (FXI) still tumbled more than 7 percent last week.

Over the past 5 years, Chinese stocks have suffered similar losses on five other occasions, according to Kensho, an analytics tool used by Wall Street banks and hedge funds to mine market history for trading insights.

After similar drops, the bearish trend continues, with Chinese equities trading negatively 100 percent of the time a month later, losing an average of 3.5 percent. During those periods, the has traded negatively 2 out of 5 times, with an average return of -0.21%.

After FXI 7% drops in 1 week, it continues to lag
Kensho
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VIDEO1:0501:05
Consumer discretionary's strong performance bodes well for the rest of 2019
Key Points
  • Since 1990, the consumer discretionary sector has a perfect track record — five for five — of posting big full-year returns after starting the first four months of the year strong.
  • Amid the flare-up in the U.S.-China trade war, some of the largest holdings in the consumer discretionary index also are among stocks Wall Street has been recommending to clients.