Breakout

Are Surging Chinese Stocks a Turning Point or Another Head Fake?

Breakout

A 3% bounce in Chinese stocks in overnight trade has given investors the world over a bit more confidence today — tradings have something fresh to digest rather than the steady drip of headlines about the ebb and flow of the fiscal cliff talks. While the Shanghai Composite chalked up its best one-day gain in three months, my colleague Michael Santoli, senior columnist at Yahoo! Finance, says there have been 20 comparable pops over the past three years.

"There's lots behind it, namely that the [Chinese] market has been beaten down so much over there that it really was poised to show some kind of bounce," Santoli says in the attached video.

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Cynics would point out that those previous rallies were little more than bear market bumps in an index that has slumped 40% since August 2009. And they might be right again. But whether or not this pop turns out to be something different, Santoli says the prior ones have typically lead to a 5% subsequent gain over the next month.

As far as reasoning is concerned, the China rally was fueled by at least two themes: first, coordinated easing by global central banks and second, the expectation that the newly selected Communist Party leadership will usher in a fresh round of economic stimulus.

"Global easing is a big deal for these guys," Santioli points out. He adds that heavy money printing by the Fed and its peers "benefits oil and commodity-related stuff, and that really drives the Chinese market."

Which brings us to incoming President Xi Jinping and the widely held expectation that he'll deliver some sort of spending and development plan under the guise of a leadership transfer game. "So now the thinking goes, this is a one party state, so you want to sandbag growth. Restrain growth while the previous guy is kind of finishing up, so you set the stage for, really, a takeoff in the economy once you have the new leader in there," Santoli says of this once-a-decade event.

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While many investors may want to see more tangible action before diving back into the world's coldest stock market, Santoli points out there are some big names who aren't waiting. They include Adam Parker of Morgan Stanley and well-respected technical analyst Tom DeMark, who presciently said just two days ago that selling was exhausted and the Shanghai Composite was poised to rally 40%.

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