Despite the temptation to do so, you simply cannot equate economic growth to stock market gains.
Take the U.S. as one example…
GDP growth forecasts have steadily declined over the past three years. Meanwhile, the U.S. stock market has steadily climbed.
Then there’s China…
Despite having one of the world’s strongest (albeit slowing) economic growth rates, China’s stock market never recovered from the 2008 global stock crash that ripped more than 70% off the value of the Shanghai Composite Index.
As you’ll see below, Chinese stocks are still about 50% off their 2008 highs. From current prices, it will take a gain of more than 115% before we see those pre-2008 prices again.
Yet, I see signs of a turnaround-in-the-making for Chinese stocks…
The thing is, you can’t compare the Chinese stock market to its U.S. counterpart. It’s just not as popular.
Instead of investing in stocks, Chinese are conditioned to put their investment funds into real estate. But they may be about to shift their focus away from real estate, and toward stocks, now that stock prices are so low, and appearing to bottom out.
After falling to the 250 support level, the Shanghai Composite Index is now holding strong. And the RSI is pointing to bullish divergence. It’s turning up as stock prices bottom at the 250 support level. That gives us an early signal that prices could be on the verge of turning up.
Value buyers may consider adding exposure to Chinese stocks now. If you’re more of a momentum buyer, preferring to let stock prices prove themselves before buying in, consider waiting until an upside break above the 318 level before going long.
Either way, one thing is certain: The Chinese stock market is wound tight, like a coiled spring. Having moved sideways for years now, any disruption to equilibrium should prompt a sharp move. I’ll keep a close eye on the market and let you know when there’s a move to make.