This has been a tell-tale year for Chinese stocks because, when you look at where benchmarks started the year, things don't seem that bad, but for those who came in near the end of the dance (always vulnerable retail), there are not enough chairs when the music stops.
Using the widely followed Hang Seng Index ($HSI) to look at the action, you see shares just slightly lower than where they started the year. The problem, though, is that they are 20% off April 2015 highs after a "retail trapping" run up in March where the government endorsed every mom and pop stock buyer. What China discovered from their American counterparts is free-trading stock markets have a mind of their own and, in the long run, are totally unpredictable.
Welcome to the truest form of Capitalism, because free trading comes with this uncontrollable monster who will seek a true level of value and this is exactly what the Chinese markets have been doing since March with a 20% rally and a 20% drop.
Combined with the overnight fall through January’s support level, this will scare the crap out of the rest of the world. European shares are lower and, as we enter earnings week in US stock trading, keep a close eye on volatility in the Hang Seng. The magic 25% panic number is not far away, and globally, you do not want the exit from retail by Chinese investors to go into a full-fledged panic sell throwing babies and mothers out the windows.
I expect one more attempt by the government to rescue the late market entries which will fail miserably. The only solution (which they didn't learn from US-based investors) is a total purge - the complete extraction of those who really could not afford the risk associated with losing 25% to 50% of the asset value invested.
Investors don't mind being swindled by an eye patch bandit, but when the national exchange dupes you out of half your stuff, you may never come back to play the game again. Just ask those who had their money with Dick Fuld at Lehman Brothers.
Steve Kanaval is the author of the upcoming Equities.com's Small-Cap Throwdown, a premium newsletter designed to help investors identify the best small-cap stocks to add to your portfolio and trading ideas to profit off them. The first issue pits the hottest beverage small-cap stocks against each other to find a winner. Sign-up here for a free issue today!
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