US Market
Chart Reading: Shanghai A Share Index and Morgan Stanley China A Share Fund (CAF)
Since last November, China Shanghai A Share Index (SSEC) has staged a powerful rebound from around 1700 to a recent high of 2650, a 50%+ gain. There are a couple of investment vehicles available to US investors to get exposure to SSEC, among them, Morgan Stanley China A Share Fund (CAF) is one that dedicated to SSEC most, with 90% exposure to A Share stocks traded on Shanghai Exchange.
The CAF is a closed-end fund that invests in large cap, growth type companies, with 55% exposure to Services (among which, 34% was on Financials), and 45% to Manufacturing. This asset allocation is on constant change, you may check the latest holding on morningstar.com.
Despite its 90% exposure to stocks traded on Shanghai Stock Exchange, CAF recently dropped heavily, broke its trendline to the downside, while SSEC only dropped slightly and was maintains its up trend, see chart below
Shanghai A Share Index
Then why the divergence? The chart below is percentage change of CAF and SSEC in one year time frame.
Shanghai A Shared Index (yellow) vs. CAF (green)
Since CAF is not an ETF tracking SSEC index, but a fund that invests in component stocks there, naturally CAF is not 100% tracking SSEC. The truth is CAF follows SSEC directionally, but beta (sensitivity of change in CAF price to the change in SSEC) alternates across 1 over time. CAF has just went through an over-sensitive period (beta > 1) relative to SSEC from early March to now, it’s now switching to less sensitive mode.
Another reason for this to happen was that even though CAF is almost all about Chinese market, since it’s traded in US, its performance is affected by the US market sentiment. As S&P 500’s March- May rally ran out of steam, CAF also got affected negatively.
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Chart Reading: US Dollar, S&P 500 and Crude Oil
A few quick updates and my thoughts on the charts of US dollar, oil and S&P since I believe oil and S&P may go against each other in the coming days.
US Dollar
It turned out the higher lows in mid-March was fake bullish sign, and now it’s gathering momentum to start a huge drop.
Crude Oil
Crude price started its latest rebound in late-Feb, about half a month earlier than March lows of S&P, then it traded side ways from late-March through April while S&P continues its enormous rebound. This time frame of sideway trading turned out to be a bullish flag, and it’s breaking out to the upside just yesterday, its target this time is $75.
S&P 500
Despite all the bad news of high unemployment rates, 10 banks not passing stress tests, and pathetic consumer spending figures, S&P continued its powerful rebound from March low of 676, with 37% gain so far. It’s heading to last bear market high of 934 hit in early January, two months before the March low, coincidentally, now it’s exactly 2 months away from March low, so it’s highly possible next Monday S&P will start a big down leg, probably 20% down, targeting Nov low of 740.
A few technical commentators have already been calling correction on S&P will start soon or in progress: Carl Swenlin from Dailymarkets.com called current pattern “bearish ascending wedge” and could correct any time soon, Mike Paulenoff from MPTrader.com noted that Thursday’s market action signaled the end of up leg that started on 4/27;
The interesting question is will energy price fall with S&P during that down leg? I say no, since energy trading has de-coupled from S&P from the pattern since last November. We will likely to see, starting from next week, for more than a month, S&P will go down led by Financials at the same time energy and shipping stocks continue their rise.
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