Tuesday, December 09, 2008
Comparing China and the Dry Baltic Index Comparing China and the Dry Baltic Index
Tuesday, 09 December 2008
The China stock market and Baltic Dry Index are in current disagreement. China manufactures things and ships them around the world. Much of that transport is done by sea. The Baltic Dry Index is an assessment of the price of moving major raw materials by sea. As global trade increases, the Baltic Dry Index tends to increase. As global trade decreases, the index tends to decrease. The number of cargo ships can and does fluctuate to moderate swings in the index, but not rapidly. That makes the Baltic Dry Index a useful tool to view global trade (and to a great extent the Chinese export economy) in a single indicator.
The following Baltic Dry Index chart shows the index collapsing in the last 6 months. However, FXI (the China ETF) did not fall nearly as much, resulting in the rising relative performance shown in the middle panel of the chart. Both FXI and the Baltic Dry have been declining, but the shipping price index has fallen farther than the the FTSE/Xinhua 25 index that FXI tracks.
The question arises, “Could they both be right”? Maybe, but maybe not.
The three-year chart of FXI shows a large drop, but the most recent period raises questions about a possible rally that writers and traders are discussing.
A more zoomed-in view of the six-month daily chart for FXI shows something is definitely happening with short-term moving averages turning up and making bullish cross-overs.
However, a 16-year monthly view of a larger China index is not as cheery. The China market is still a good way off from where it bottomed in 2001. Maybe that was in the “old days” before China became so prominent, but maybe that is a better indicator of where China stock prices may go.
Zooming in to a 1-year daily chart of the MSCI China index, the recent tilt up is not quite as persuasive. The comparable upward moves in February and April were bear market rallies, as the current upward move may also be. This may be more of a tradeable rally than a sustainable reversal of trend. It is too early, in our view to make a fundamental argument for a trend reversal, but may not be too early to make a trading argument.
On the other hand, it is safer to bet against moves that are against the major trend, than to bet with moves that are against the major trend. If the major trend is still down, selling rallies is safer than buying them.
From a fundamental perspective, the direction of the economy in China is still for reduced expectations, rising unemployment and company financial difficulties, reduced exports, and housing value declines. The government is implementing capital infusions to support the economy.
From a technical perspective, the conditions are changing in the shorter end. Market Edge Second Opinion is a technical service with this view:
• Neutral, up from avoid since mid-November,
• Mildly improving conditions,
• Not a short candidate,
• Not ready as a buy candidate,
• Mixed bullish and bearish indicators.
One of their indicators is Moving Average Convergence Divergence (”MACD”) which is shown in the StocksCharts.com charts above. MACD is giving bullish signals and recent resistance has been pierced, but the intermediate trend is still down; and the long-term MSCI charts show there is still room below for more market price declines.
Here are some news clippings about the condition of the Baltic Dry Index, the condition of the Chinese steel industry, and the current and prospective market for basic materials, all of which have relevance to your decision about whether the primary down trend for China, and FXI in particular, is preparing to reverse or simply experience a counter-trend rally.
As adapted from Seeking Alpha
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