While we weren’t watching, the Chinese stock market ETF, FXI, has been quietly rising alongside and mirroring the rise in US equities. This past week it broke above an important resistance line that goes back more than 3 ½ years. You are probably wondering what makes this so interesting because as you can see in the very bottom pane of the chart the SP500/FXI ratio, Chinese stocks have not outperformed the US market but instead has just kept pace and been moving in lockstep. What makes this move in China so significant is it has been done with the backdrop of one of the most impressive rallies in the dollar we have seen since 2008. Virtually all other foreign equities and non-dollar denominated assets have struggled mightily during this same period yet China stocks have been rising.
From a chart standpoint and in addition to the breakout, price is well above the 30-week moving average, the MACD histogram is both rising and above the zero line and the RSI is above its mid-line and has been nicely respecting the range of movement one would expect during a strong bull move. In spite of all the bullish arguments I just can’t get on the bandwagon right here. I realize I may regret this decision but the negative divergence (lower highs on the RSI while price has created higher highs in an overbought condition) is screaming at me. You can see what happened the negative divergence raised its ugly head in Dec 2012-Feb 2013, the ETF fell ~20%. I have come to learn that unless the weight of the evidence is compellingly positive, it is best to move on to the next opportunity. You may end up missing out on a few good ones but investments are like public transit, if you miss your bus, just be patient as the next one will be by in 20 minutes or so.
