Believe It: A Breakout is Possible for Chinese Stocks
February 20, 2014

Chinese stocks and the exchange traded funds that hold those shares have been disappointments this year.

Despite ongoing calls that Chinese stocks are inexpensive, the iShares China Large-Cap ETF (FXI) has performed slightly worse than the iShares MSCI Emerging Markets ETF (EEM) since the start of the year.

A look at a long-term chart of the Shanghai Composite, provided below courtesy of Chart of the Day, indicates the mainland benchmark index is once again bumping up against critical resistance.

Chart Courtesy: Chart of the Day

The Shanghai Composite is up almost 1.6% this year, but if it can break the aforementioned technical resistance, that should light a fire under the db X-trackers Harvest CSI 300 China A-Shares Fund (ASHR) and the Market Vectors China ETF (PEK) . The reason: Stocks traded in Shanghai are classified as A-shares and ASHR and PEK are the only U.S.-listed ETFs to offer investors direct access to A-shares equities. [A-Shares ETFs Increase EM Access]

ASHR launched in November 2013 and already had nearly $196 million in assets as of Feb. 18. The ETF, the first to offer non-derivatives access to China’s A-shares markets, was so successful out of the gate that Deutsche Asset & Wealth Management lowered the fund’s fees last month. [Deutsche Lowers Fees on A-Shares ETF]

Although ASHR and PEK are not direct Shanghai Composite proxies (ASHR tracks the CSI 300 Index), the ETFs would merit consideration assuming the Shanghai Composite breaks out.

“Over the past three years, the Shanghai Composite Index has traded within the confines of a relatively steep downward sloping trend channel. Over the past month, the Shanghai Composite has worked its way higher to where it is testing resistance (red line) for the 7th time since early 2011,” according to Chart of the Day.

Adding to the potential allure of ASHR and PEK if Chinese equities rebound and notch legitimate rallies is how off-guard some investors would be caught by the sudden ebullience.

“The timing for a breakout like this would be pretty perfect – it’s literally the last thing anyone expects and you couldn’t find a China Bull at the Guangdong Rodeo these days,” says Josh Brown on The Reformed Broker.

Tom Lydon’s clients own shares of EEM.