Shanghai Express -- 2009 Version

Back in early 2007, I highlighted the Shanghai Stock Index because a
mania had formed that could induce a bubble. The index was trading
around 3500, and I argued that to form a true, spectacular bubble,
the index would have to rise to 6700, perhaps in 2008. Well, it
continued on its parabolic way and did top 6000 by 10/07, before
rolling over into a deep bear. That run was bubble enough for most
people.

The Shanghai entered a new cyclical bull market in 10/08 as players
responded to a massive $580 billion stimulus package, and so it
qualifies as a cycle leader presently. Using a long term 10% real
economic growth rate, I value the Shanghai at 3200 - 3500 presently.
The index is now trading a little below the 3200 mark . Two big
caveats are in order on fundamental value. First, this is a volatile
index. Second, it can trade away from fundamental value for
extended periods of time. It was, as examples, deeply undervalued
over the 2001 - 2005 period and seriously overvalued for much of
2007 and a good slug of 2008.

I have included a price chart for the index and it shows that the
market is getting overbought short term. You will note that for
most markets, an RSI of 70 is a good warning of an overbought, but
for the Shanghai, make that a 90 RSI as this baby likes to blow off.

There are some good objective sources on China. One is economist
Mike Pettis, a Beijing based finance prof. (http://mpettis.com) and
the other is Caijing (http://english.caijing.com.cn). Check both as
counterweights to the China mavens.

Shanghai chart.