Chinese Stocks Break Below 50-DMA

Yesterday we noted that China's benchmark stock index (Shanghai Composite) managed to put in a modest rally after testing its 50-day moving average (DMA).  The support at the 50-DMA didn't last long though.  Last night the Shanghai Composite dropped nearly 3% for its first close below the 50-DMA since January.  After nearly doubling YTD, the index is now down by over 12% from its peak on August 4th.  Given that China is supposed to be the engine of global growth and has been a leader in the global equity rally, it will be interesting to see if other country indices follow suit to the downside.  With the Dow down 150 this morning, we might have our answer already.

 

Sector performance in China paints an interesting picture.  In typical selloffs, sectors that lead the rally see the steepest declines, while laggards in the rally tend to outperform.  In this selloff, however, this trend is much less evident.  The chart below shows the average performance of Chinese stocks by sector during the rally and since the peak on 8/4.  While Energy led the rally and has seen the sharpest decline, in other sectors the relationship has been much less evident.  For example, Utilities and Telecom Services were in the bottom four in terms of performance during the rally, but during the decline they have also been among the weakest sectors with the second and third worst performance.

 

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