Market Analysis

Chinese Market Analysis 

Hi, Changsheng here again.

-Three exchange days ago Chinese market 3 major indexes suddenly dropped. After 3 days of technical rally, how is everything going?

Shanghai composite index daily chart

ChinNext Price Index daily chart

From the first graph we can see, Shanghai composite index has successfully covered the dropped 3 days ago, and it ever growth up even higher than the starting point of fall down.
From the second graph, ChiNext Price Index only rebound half way. Yesterday it rallies up 1712 point in the morning, but after it hit 1712 point, it is seen really tired, and fall back to opening price. PS: Monday it fell down from 1730 point.

Why they have so much different? It has to analyze from what makes up those Index.
Shanghai composite index is made up of a big bank, insurance companies, some amount of technology bellwether. So it is like the Dow Jones.
ChiNext Price Index is made up by growth companies, small technology companies, and regional companies. It is like S&P 500.

Some people may ask, I know what is make up the Index, but why it has so much different between Shanghai Composite Index, and ChiNext Price Index? It does not seem to much variance between the Dow Jones and S&P 500.
Well, that is because before 2014's bull market, ChiNext Market already growth 2.68 time - from lowest 585.44 to highest 1571.40. The time period is formed November 2012 to February 2014.
Following picture:

ChinNext market first trend

So the average PE ratio of ChiNext market's constituent stocks in November 2012 is about 26, and by 2014, the PE ratio is about 70. Seventy average PE is already high.

But the sign of the China bull market starting point is 07/28/2014.

The following picture:

Shanghai composite (March~August)

So after only few month of "technical adjustment" ChiNext market follow the bull trend climb up to the history high of 4037.96. 

Almost the same time Shanghai Composite hit the 10 years history high at 5178.19.

Following two picture:

Shanghai Composite trend(2012~2016)

ChiNext Price Index trend(2012~2016)

After the big bull, almost every stocks in China, their price got break down to half, and the two years of correction.

After all the story let's do some Algebra :)

PE of ChiNext market average in November 2012: 26

Price of ChiNext Price Index in November 2012: 585

PE of ChiNext market average in March 2013: 70

Price in March 2013: 1571

And the highest point of ChiNext market is 4037

so you have the PE at the highest point yet?

Now cut it in half, what do you get?

Do you have something between 48.5~63.55?

GOOD, cause 48.5 is the static PE ratio, and 63 is dynamic PE.

But it doesn't matter, cause neither of them is good.

Right now, what is the average PE of Shanghai composite Index constituent stocks?

Static:18.42

Dynamic: 15.55.

No wonder Goldman Sachs rating Chinese stocks is something "Have to have", they adjustment it from nice to have few days or weeks ago. Of cause, they are talking about those blue chips.

I think for blue chips stocks right now, they have a really big upper space. For us, we can invest some blue chip stock dispersed. 

Or, if you want something to stimulate, can short some GEM stock.

So that is for today, it is kinda late but hope you guy still keep up with my update and pointed out something that you think is wrong. Also, plz leave a comment for anything you don't know or you want to ask.

See you soon!

PS: Following weekend I'm writing something big. Probably come out Monday. 

Disclaimer:
All the information is collected online.
All investments involve risk, including loss of principal. Past performance does not guarantee future results. There is no assurance that the investment process will consistently lead to successful investing. Asset allocation and diversification do not eliminate the risk for experiencing investment losses.
All the recommendations are base on personal experience, I'm not responsible for any action taking based off of my recommendations.