Chinese Equity Exhaustion

China hasn’t been faring too well in 2013. All the talk of ghost cities and a cooling down of the Chinese economy appears to have put the brakes on for the iShares China 25 Index ETF ($FXI). While the weakness over the last few months is troubling, China has actually been underperforming U.S. equities since 2009.

Below we have a relative performance chart comparing $FXI and $SPY. As the line rises we know that China ($FXI) is outperforming (rising more or falling less) than U.S. large cap stocks – with the opposite being true when the green line is falling. In Sept. of last year we saw a bounce in relative performance with China taking back the reins and leading the S&P 500 to finish out the year. With the trend change favoring U.S. large caps we are now back near the level we saw in Sept ’12 and October ’08. This could provide a layer of support for $FXI to gain some steam and outperform $SPY in the coming weeks.

Looking at the RSI indicator we can see that momentum has fallen to previous lows. As you can see when the RSI has gotten to the present level it has corrected. While this can give a good indication of a possible low, we often see a divergence take place before an ultimate bottom is put in. However, with the low RSI reading and the ratio between the two markets nearing support, there is a fair chance we see some type of consolidation or short-term trend change approaching. If we do see a shift and $FXI begins to outperform $SPY then we would look to the previous high at the end of last year and the falling trend line to be possible levels of resistance for the ratio.

If there’s a chance of China picking itself up off the floor in relation to the S&P, we ought to look at a chart of $FXI by itself. $FXI has gaped down the past two trading days taking the ETF to the 200-day moving average (blue line). Typically moves like this that occur at the end of an identified trend are considered exhaustive gaps. That pattern could be what we are seeing in Chinese equities, which gives a point to the $FXI bulls.

Disclaimer: Do not construe anything written in this post or this blog in its entirety as a recommendation, research, or an offer to buy or sell any securities. Everything in this post is meant for educational and entertainment purposes only. I or my affiliates may hold positions in securities mentioned in the blog. Please see my Disclosure page for full disclaimer. Connect with Andrew on Google+.