Sep
18
An Upcoming Bull Market in China? from Leo Jia
September 18, 2013 |
Attached is a weekly chart of CSI300 index (representing 300 large stocks on Shanghai and Shenzhen exchange) from January 2007 to now.
Would anyone call an upcoming bull market from this?
Perhaps the chart is not too obvious yet. Fundamentally, it is true that many foresee a slowdown in GDP growth in the coming years. But what is important now is that people can anticipate some structurally healthy growth. And this is very different from the past 5 years when the growth seemed high but the market mainly saw it as unhealthy and stayed essentially hopeless. The new government seems to deliver a lot more confidence to the market with a new direction for the economy.
Any thoughts?
Bill Rafter writes:
One suggestion I have is that you ask yourself two questions:
1. Consider the participants in that market; what time frame do they typically observe in terms of long term perspective (i.e. lookback period), and
2. How frequently do they watch the market?
The reason to care what others do is because they are your competition. The money you make, you get from them. Thus, know them!
Point #1 may also be related to taxation. Is there a period of time in China such that if a position is held that long it qualifies for a tax break? In the U.S. that means it qualifies as a "long term capital gain" with a significantly reduced amount going to the confiscatory government.
If there is no such period, then it's nice to see history going back to 2007, but it is irrelevant to what is happening now. However it is good to have history as you can easily see with a visual how a market behaves with the signal process you use. You should statistically test, of course, but a quick look is valuable. (Tukey said so, and he is a god in this area.)
Thus your window of observation for decision making (as opposed to history) should not go back perhaps more that 50 percent greater than the period identified in point #1. In our case (in the U.S. with equities), we do not look back farther than a year and a half. Frequently as little as four days.
Point #2 is the shorter end. If everyone watches the market every day, then by limiting your snapshots to weekly, you are discarding valuable information. Ask yourself, "Why would you ever want to eliminate valuable data?" You would not do that with a neural net, so why do it with real intelligence? Some would posit that weekly information (data or charts) eliminates some noise. However we would argue (and have demonstrated) that it is impossible to separate signal from noise. Specifically I would suggest that if someone gave me what they considered noise, I could find some signal within. It may not be the best example of signal, but it's in there.
Leo Jia adds:
Thank you very much, Bill, for the precious advice.
There are a couple reasons for me to have attached the weekly chart starting from 2007.
1. I look for a possible multi-year bull market, and for that to me the trend looks clearer on the weekly chart.
2. One key reason for the past few years' laggard market, aside from those fundamental reasons I outlined, is the bull-run and crash in 2007-2008. The bull-run was solely due to the government reform initiative in the stock market which tried to ensure all shares (government shares and floating shares) to be equal. The crash then was mainly due to market suspicion that the resulting floatable government shares would subsequently flood the market. Now 5 years over, the flooding of the government shares, if that happened indeed, is likely to have settled down.
To answer your two questions:
1. There is no tax incentive in China encouraging people to hold longer. Holding period are generally much shorter. It can be as short as a few months for funds, and as short as a few days for individuals.
2. Most participants watch the market everyday.
Perhaps one thing different in China's market is that large market movements are all initiated by government policies. Market enthusiasm are only summoned when the imagination of a government direction as positive.
I am not a government analyst, but traditionally, each government in its 10 years tended to create at least one big upward move in the market. Looking at this government, its initial months already showed signs of its focus on finance (along with new direction on economy). The recent launch of bond futures is one such key move.
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