Despite concerns over a slowdown in the Chinese economy, a bull market may be on the horizon for China in the second quarter, according to Jordan Kotick, managing director of technical strategy at Barclays Capital.
Applying the widely-followed Dow Theory to the Shanghai composite index and the MSCI China Transport Index, Kotick says the theory indicates that a buy signal is coming together in China for the next quarter.
According to the Dow Theory, the transportation and industrial averages must move higher in tandem to indicate a lasting bull market. Traditionally, the theory has only been used for U.S. markets to determine tops or bottoms.
“In September of 2011, the transports [in China] made a new low but it wasn’t until January of this year that the Shanghai made a new low,” noted Kotick. “So if the Shanghai composite can hold the lows, then what you have is a Dow Theory bull signal for China in the second quarter. This would be the bullish sign we will watch for in the next couple of weeks.”
Last year, the Shanghai Composite Index tumbled more than 20 percent. And so far in 2012, the index has gained a mere 3 percent, lagging behind the S&P 500’s impressive 12 percent rally.
“Most of the move this year has been led by America, but if we’re going to get emerging markets to kick in, China, which has clearly underperformed by most averages over the last 12 months has to come to the party,” he said.
Meanwhile, Kotick warned that he sees bearish signals coming from the euro zone.
“If China doesn’t give us the bull signal and there’s trouble ahead in the second quarter, we think the answer is going to come from Spain,” he cautioned. “Spain’s IBEX 35 has not participated in the upside—it is only about 4 percent away from breaking to lows of 2011. Plus, in the month of March, we’ve seen these spreads against Germany widen 22 percent.”
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