From the Desk of Steve Strazza @Sstrazza
Equity markets around the globe are getting rocked as we close out another rough week.
And then there's China, which is green on the day.
This isn't just a one-day thing. In fact, it's quite the opposite. China has been showing impressive relative strength since bottoming in late October.
Today is just a microcosm of what that leadership has looked like.
It's had our attention for a while already, which is why we're about to discuss the structural outlook for Chinese stocks and outline some long ideas in the strongest names.
Here's the performance of a basket of international equity ETFs since markets bottomed and ripped higher on Oct. 13:
While China didn't bottom until a few weeks later, on Oct. 31, the MSCI China ETF $MCHI has still outperformed other global stock market indexes over this period.
When we look at the performance of Chinese Technology $CQQQ, the leadership is even more pronounced. Most US-listed Chinese stocks fall into the tech category.
When we take a look at the relative trend of Chinese tech versus the broader market, we couldn't have bottomed at a more logical level:
Notice how the spring lows coincide with where the ratio bottomed back in 2012 and 2013.
After briefly undercutting this crucial support zone as momentum printed a bullish divergence, the relative trend blasted higher, kicking off a fast move in the opposite direction.
Shakeouts and failed moves like this are not at all uncommon during turning points in the primary trend.
We think that's what's taking place now. The lows for China are likely in on a relative basis.
How about the absolute price chart?
No matter what Chinese index we're looking at, the price action is all the same. These stocks are rebounding off major support levels and/or reclaiming key former lows.
Here's the iShares MSCI China ETF $MCHI finding support at its 2011 and 2016 lows:
We're also seeing a flood of momentum thrusts in Chinese ETFs and individual issues.
While these bullish initiation readings had at first shown up on short-term time frames only, this momentum has flowed into more intermediate-term indicators such as the five-week rate of change in the lower pane above.
You'd see something similar on the one-week and 3-week intervals, and it's not just MCHI.
We've been observing these momentum thrusts in the technology indexes, the iShares China Large Cap ETF $FXI, and even MSCI Hong Kong $EWH.
The bottom line is that the bottom is in for these stocks. The evidence continues to build in the bulls' favor.
What do we do when an area is showing extreme relative strength, and the primary trend appears to be turning higher?
We throw them all onto a list and filter for the strongest names and most favorable chart setups.
Here's our China Leadership Scan:
One common theme with these stocks is that most of them bottomed in the first half of 2022 and have been building formidable bases for several quarters now.
Just look at how many are already positive on the year.
Many of these names have either recently resolved higher from reversal patterns or are on the verge of completing bottoming formations as we speak.
Let's discuss some of our favorites now.
