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Is the Chinese Stock Market Plunge Over? image

Dave M's friend and business partner, Paul Schatz of Heritage Capital, LLC is filling in this morning. We are pleased to be able to offer Paul's thoughts on the state of the market and hope that you enjoy his views.


I remember the outrage when the government sought to pull off TARP in 2008, first buying troubled, illiquid assets from the big banks which then morphed into outright capital injections into the banks. When QE was announced, the calls were equally as emotional, not to mention the myriad of special Fed programs designed to provide liquidity in the financial system when there was little.

I can only imagine what those naysayers believe now regarding China.

This is not a new topic here, but I do want to reiterate my own analysis about the collapse in the Chinese stock market. I have seen interesting comparisons to China’s stock market right now and ours during the crash of 1929 period. For now, they seem to line up very nicely and suggests further downside. However, a note of caution; eventually, all market comps break apart.

The Chinese are not experienced in dealing with the pitfalls of an almost free market financial system, but they are certainly smart enough not to make the same mistakes we did to cause the Great Depression. It does seem, however, that they believe they can manipulate their way back to a bull market in stocks, something our government learned was impossible in 2007 and 2008.

After the Shanghai Index peaked on June 12 and began to spiral lower, the Chinese government started a series of measures to curb selling. They shelved all IPOs. The 21 largest brokerages created a consortium to inject money into stocks. When both failed, the government prevented large shareholders (5% or more) from selling any stock for six months. As all this unfolded, hundreds of non state owned, non blue chip companies requested that their stocks be suspended from trading until volatility subsided. At last count, those companies numbers roughly 700.

Market bottoms do not end with increased manipulation and a lack of liquidity. There are billions, if not trillions, in pent up selling demand waiting to be unleashed if and when the Shanghai begins to function semi-normally. Just like the Bank of England and Bank of Switzerland learned, you can’t ultimately prevent investors from selling no matter how hard you try.

I would also argue that had they left the free market to determine price, the Chinese market might have crashed like ours did in 1987, but the bottoming period would already have begun. Now, with the Shanghai down 28% from high to low and the smaller indices much more, it looks like that market is ultimately headed at least 5-10% lower than the lows so far, if not a whole lot more this year.

Paul Schatz

Paul Schatz is President and Chief Investment Officer of Heritage Capital, LLC, in Woodbridge, CT. and a Managing Partner at Numetrix Capital, an investment research firm focused on multi-manager, multi-strategy portfolio solutions.

This Morning's Pre-Game Indicators

Here are the Pre-Market indicators we review each morning before the opening bell...

Major Foreign Markets:
    Japan: +0.67%
    Hong Kong: +0.43%
    Shanghai: +0.45%
    London: +0.57%
    Germany: +1.60%
    France: +1.58%
    Italy: +1.41%
    Spain: +1.41%

Crude Oil Futures: +$0.40 to $51.81

Gold: -$5.00 at $1142.40

Dollar: lower against the yen, higher vs. euro and pound

10-Year Bond Yield: Currently trading at 2.390%

Stock Indices in U.S. (relative to fair value):
    S&P 500: +11.35
    Dow Jones Industrial Average: +77
    NASDAQ Composite: +35.20

Thought For The Day:

A smile is the lighting system of the face, the cooling system of the head and the heating system of the heart. - Unknown

Current Market Drivers

We strive to identify the driving forces behind the market action on a daily basis. The thinking is that if we can both identify and understand why stocks are doing what they are doing on a short-term basis; we are not likely to be surprised/blind-sided by a big move. Listed below are what we believe to be the driving forces of the current market (Listed in order of importance).

      1. The State of the Greek Crisis
      2. The State of China's Stock Market
      3. The State of Fed/ECB/PBoC Policy
      4. The State of the Earnings Season

The State of the Trend

We believe it is important to analyze the market using multiple time-frames. We define short-term as 3 days to 3 weeks, intermediate-term as 3 weeks to 3 months, and long-term as 3 months or more. Below are our current ratings of the three primary trends:

Short-Term Trend: Moderately Positive
(Chart below is S&P 500 daily over past 1 month)

Intermediate-Term Trend: Neutral
(Chart below is S&P 500 daily over past 6 months)

Long-Term Trend: Moderately Positive
(Chart below is S&P 500 daily over past 2 years)

Key Technical Areas:

Traders as well as computerized algorithms are generally keenly aware of the important technical levels on the charts from a short-term basis. Below are the levels we deem important to watch today:

  • Key Near-Term Support Zone(s) for S&P 500: 2080
  • Key Near-Term Resistance Zone(s): 2120-2135

The State of the Tape

Momentum indicators are designed to tell us about the technical health of a trend - I.E. if there is any "oomph" behind the move. Below are a handful of our favorite indicators relating to the market's "mo"...

  • Trend and Breadth Confirmation Indicator (Short-Term): Positive
  • Price Thrust Indicator: Negative
  • Volume Thrust Indicator: Neutral
  • Breadth Thrust Indicator: Neutral
  • Intermediate-Term Bull/Bear Volume Relationship: ModeratelyPositive
  • Technical Health of 100+ Industry Groups: Moderately Positive

The Early Warning Indicators

Markets travel in cycles. Thus we must constantly be on the lookout for changes in the direction of the trend. Looking at market sentiment and the overbought/sold conditions can provide "early warning signs" that a trend change may be near.

  • S&P 500 Overbought/Oversold Conditions:
          - Short-Term: Neutral
          - Intermediate-Term: Oversold
  • Market Sentiment: Our primary sentiment model is Neutral .

The State of the Market Environment

One of the keys to long-term success in the stock market is stay in tune with the market's "big picture" environment in terms of risk versus reward.

  • Weekly Market Environment Model Reading: Neutral

The opinions and forecasts expressed herein are those of Mr. Paul Schatz and may not actually come to pass. Mr. Schatz's opinions and viewpoints regarding the future of the markets should not be construed as recommendations. The analysis and information in this report is for informational purposes only. No part of the material presented in this report is intended as an investment recommendation or investment advice. Neither the information nor any opinion expressed nor any Portfolio constitutes a solicitation to purchase or sell securities or any investment program.

Any investment decisions must in all cases be made by the reader or by his or her investment adviser. Do NOT ever purchase any security without doing sufficient research. There is no guarantee that the investment objectives outlined will actually come to pass. All opinions expressed herein are subject to change without notice. Neither the editor, employees, nor any of their affiliates shall have any liability for any loss sustained by anyone who has relied on the information provided.

The analysis provided is based on both technical and fundamental research and is provided "as is" without warranty of any kind, either expressed or implied. Although the information contained is derived from sources which are believed to be reliable, they cannot be guaranteed.

Paul Schatz, an advisor representative of CONCERT Wealth Management Inc. (CONCERT), is founder of Heritage Capital LLC, a legal business entity(Heritage). Advisory services are offered through CONCERT Wealth Management, Inc., an SEC registered investment advisor. For a complete description of investment risks, fees and services review the CONCERT firm brochure (ADV Part 2) which is available from your Investment Representative or by contacting Heritage or CONCERT.

Heritage Capital a state-registered investment adviser. Heritage also serves as a sub-advisor to other investment advisory firms. Neither Heritage or CONCERT is registered as a broker-dealer.

Employees and affiliates of Heritage may at times have positions in the securities referred to and may make purchases or sales of these securities while publications are in circulation. Editors will indicate whether they or Heritage has a position in stocks or other securities mentioned in any publication. The disclosures will be accurate as of the time of publication and may change thereafter without notice.

Investments in equities carry an inherent element of risk including the potential for significant loss of principal. Past performance is not an indication of future results.