A financial blog on investing in stocks, commodities and the gold bull market.
Wednesday, May 23, 2007
The China Bubble
We have all been hearing lately how the Chinese stock market is in a bubble and ready to collapse any day. Seems everyone is in agreement right? However when you actually think about this a bit a few things don't add up. First off when have we ever had a bubble where everyone knew it was a bubble? In 99 & 00 the vast majority of investors were convinced that we had entered a new paradigm. All that mattered was how many eyeballs saw your website, the money would come, the world had entered a permanently high level of economic bliss, etc. etc. Now lets progress to the real estate bubble. At the top in the summer of 05 we were hearing all kinds of excuses for why the real estate boom was not a bubble, from a scarcity of land (Cramer) to the good old cliche "well real estate never goes down" blah, blah, blah. What I'm trying to get across is that bubbles are characterized by mass denial and ludicrous reasoning for why the bubble is in fact not a bubble. That's not happening yet with China. Everyone seems to agree that it is a bubble. Now lets go back to 99-2000. About half the population was buying tech stocks. The public was in, big time. Same thing for real estate. Everybody buying, multiple houses. ARMS, option ARMS, what ever it took just buy. So recently we've been hearing stories of China opening 300,000 brokerage accounts a day. 2.7 million more accounts opened in 06 than 05. Whew the public is in big time right? Lets say even if China opened 300,000 for every day of this year and we add on the 2.7 million from last year and lets give them 10 million already existing. That means the public in China has roughly 55 million active retail brokerage accounts. Wait a minute the population of China is 1.3 billion, that's billion with a B. That means a whopping 4.2% of the population is now into the stock market. It's definitely heading in the right direction but still a far cry from the 50% that has characterized most of the bubbles throughout history. There just may be a ways to go yet if a really significant portion of the population enters into the fray.
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T1. A move followed by a sideways range often precedes another move of almost equal extent in the same direction as the original move. Generally, when the second move from the sideways range has run its course, a counter move approaching the sideways range may be expected. T2. Reversal or resistance to a move is likely to be encountered: - 0n reaching levels at which in the past, the commodity has fluctuated for a considerable length of time within a narrow range - On approaching highs or lows T3. Watch for good buying or selling opportunities when trend lines are approached, especially on medium or dull volume. Be sure such a line has not been hugged or hit too frequently. T4. Watch for "crawling along" or repeated bumping of minor or major trend lines and prepare to see such trend lines broken. T5. Breaking of minor trend lines counter to the major trend gives most other important position taking signals. Positions can be taken or reversed on stop at such places. T6. Triangles of ether slope may mean either accumulation or distribution depending on other considerations although triangles are usually broken on the flat side. T7. Watch for volume climax, especially after a long move. T8. Don't count on gaps being closed unless you can distinguish between breakaway gaps, normal gaps and exhaustion gaps. T9. During a move, take or increase positions in the direction of the move at the market the morning following any one-day reversal, however slight the reversal may be, especially if volume declines on the reversal.
General Trading rules
G1. Beware of acting immediately on a widespread public opinion. Even if correct, it will usually delay the move. G2. From a period of dullness and inactivity, watch for and prepare to follow a move in the direction in which volume increases. G3. Limit losses and ride profits, irrespective of all other rules. G4. Light commitments are advisable when market position is not certain. Clearly defined moves are signaled frequently enough to make life interesting and concentration on these moves will prevent unprofitable whip-sawing. G5. Seldom take a position in the direction of an immediately preceding three-day move. Wait for a one-day reversal. G6. Judicious use of stop orders is a valuable aid to profitable trading. Stops may be used to protect profits, to limit losses, and from certain formations such as triangular foci to take positions. Stop orders are apt to be more valuable and less treacherous if used in proper relation the the chart formation. G7. In a market in which upswings are likely to equal or exceed downswings, heavier position should be taken for the upswings for percentage reasons - a decline from 50 to 25 will net only 50% profit, whereas an advance from 25 to 50 will net 100% G8. In taking a position, price orders are allowable. In closing a position, use market orders." G9. Buy strong-acting, strong-background commodities and sell weak ones, subject to all other rules. G10. Moves in which rails lead or participate strongly are usually more worth following than moves in which rails lag. G11. A study of the capitalization of a company, the degree of activity of an issue, and whether an issue is a lethargic truck horse or a spirited race horse is fully as important as a study of statistical reports.
Investing in the financial markets can involve considerable risk. Past performance is not necessarily an indication of future performance. The information included in The Smart Money Tracker and The SMT subscribers daily updates is prepared for educational purposes and is not a solicitation, or an offer to buy or sell any security or use any particular system. Information is based on historical research using data believed to be reliable, but there is no guarantee as to its accuracy. G.D.S L.L.C., nor Gary Savage, do not represent themselves as acting in the position of an investment adviser or investment manager for funds that are not under their direct control and fiduciary responsibility. GDS L.L.C., Gary Savage, will not provide you with personally tailored advice concerning the nature, potential, value or suitability of any particular security, portfolio or securities, transaction, investment strategy or other matter. From time to time, GDS L.L.C., Gary Savage, may hold positions in securities mentioned, but are under no obligation to hold such positions.