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This Saturday, February 10, is Lunar New Year or Chinese New Year and it will usher in the year of the dragon. Traditionally, the dragon has been a symbol of good luck, strength, and health. All of which have been lacking for China’s Shanghai Comp and Hong Kong’s Hang Seng indexes as both have languished since peaking in late 2021. Some signs of a possible turnaround have begun to materialize with both indexes rebounding off their respective 2024 lows.

A slew of global equity markets are testing key bull market Up trendlines.

After a few slow weeks, our #TrendlineWednesday feature on Twitter today was more prolific. Much of that can be attributed to a wide array of equity indices testing key bull market uptrends. Specifically, several are testing their cyclical bull market Up trendlines – primarily from early-2016 lows (although, some of us would argue that the cyclical bull actually still stems back to 2009). In any event, these ~2-year old trendlines hold considerable significance. They have provided the necessary support to maintain the bull markets’ pace of advance thus far. Therefore, a break of such support would undermine the pace of advance, at a minimum – and potentially subject the markets to meaningful downside pressure.

As mentioned, several of these trendlines are under siege currently from a number of equity indices, both domestically and abroad. Leading off, due to visibility, is the Dow Jones Industrial Average which is testing the Up trendline from its early 2016 lows.

Similarly, the broader NYSE Composite is also testing its post-2016 Up trendline.

As we mentioned above, it’s not just U.S. indices experiencing tests of their bull market uptrends. In Hong Kong, the Hang Seng is also testing the Up trendline from its 2016 lows.

And around the world in Chile, we see it’s benchmark stock index, the IPSA likewise testing its post-2016 Up trendline.

Finally, another emerging market, Taiwan, is testing its Up trendline stemming back to its cyclical low in 2015.

So what will become of all these key trendline tests? Time will tell. There are markets that we like a great deal — and others that we don’t. But the fact that we have an abundance of tests underway simultaneously suggests that we’re at another important juncture in the global market — so stay on your toes.

If you’re interested in the “all-access” version of our charts and research, please check out our new site, The Lyons Share. You can follow our investment process and posture every day — including insights into what we’re looking to buy and sell and when. Thanks for reading!

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Hong Kong’s red hot stock market is running into potential chart resistance that may slow its pace of advance.

Following the global equity selloff of 2015-2016, many markets, foreign and domestic, rebounded with a vengeance. Unfortunately for Hong Kong, its benchmark Hang Seng Index (HSI) was not among them. After plummeting to begin 2016, the HSI did bounce back respectably into September. However, a late-year swoon left the Index with a minuscule +0.4% return for the year, and a dismal 2-year return of -6.8%, the 6th weakest among all the markets that we track around the world. 2017 has been a different story, however.

The Hang Seng is ahead by over 20% year-to-date, 6th best among all international stock markets. So things are certainly looking up for Hong Kong investors this year. That said, there is at least one reason to expect the HSI’s gains to slow down from this point.

If we scroll back to the HSI’s lows in 2008-2009, we can chart a well-defined Up trendline, supporting prices through the middle of 2015. In the August 2015 rout, prices broke down through the trendline decisively and has not revisited it since...until now.

The Hang Seng’s latest rally -- a 6% jump here in July -- has it testing the underside of that broken post-2008 Up trendline.

If the old adage that former support becomes resistance holds true, the HSI’s pace of advance may be slowed here. Note that we aren’t saying the index cannot rise further. The trendline in question is still rising, so the HSI can as well, even if prices cannot surmount it. That’s why we say “the pace” of advance could be limited.

A good example of this dynamic was the Dow Jones Industrial Average bumping up against its post-2009 Up trendline back in March. While the DJIA has been able to make higher highs since, it has remained below the trendline, thus experiencing a slower rate of advance.

So does this “speed limit” remove any enticement to invest in Hong Kong now? Actually, for U.S. investors looking for exposure to Hong Kong equities, there just may be an attractive setup developing. In a Premium Post at The Lyons Share, we share with members how to access such exposure and lay out the specific setup in question.

If you want the “all-access” version of our charts and research, we invite you to check out our new site, The Lyons Share.

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Hong Kong’s Hang Seng Index is bumping into potential technical resistance.

Of the scores of global equity indices we track, perhaps the most boring has been the Hong Kong Hang Seng Index. That includes the past 12 months as well as during this decade. Over the past 7 years, the index is almost literally unchanged. In 2010, it opened the year trading at 21,860. Its opening print in 2017 was 21,993. More recently, it hasn’t been much more exciting as it is essentially unchanged over the past 5 and 15 months as well.

In the spring of 2015 (probably the last time we deemed the index “post-worthy”), the Hang Seng did cause some ripples by shooting sharply above its 6-year highs. The breakout would fail spectacularly, however, and the index would subsequently plummet to 4-year lows in the global equity rout culminating in February 2016. And while the action in the Hang Seng since has been quite mundane, those two events do make for some noteworthy reference points.

Specifically, the high in May 2015 and the low in February 2016 mark the origins of 2 converging trendlines that form a symmetrical triangle, or pennant, on the Hang Seng’s chart. The post-May 2015 Down trendline connects the highs in September-October of last year while the post-February 2016 Up trendline connects the June and December 2016 lows.

The reason we bring it up now is because the Hang Seng is now testing once again the post-2015 Down trendline, around 23,000. This could serve as resistance in the immediate-term for Hong Kong stocks.

Now, this is hardly the most important or thought-provoking chart we’ve ever posted. But it does illustrate what appears to presently be the dominant technical determinant of prices for the Hang Seng. And it does lay out the potential determining factor of the next directional move in prices. Specifically, whichever way this pennant breaks – up or down – technical textbooks would tell us to expect prices to continue in that direction over the foreseeable future.

Plus, such a break may actually liberate the index from its bout of boringness.

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More from Dana Lyons, JLFMI and My401kPro.

The commentary included in this blog is provided for informational purposes only. It does not constitute a recommendation to invest in any specific investment product or service. Proper due diligence should be performed before investing in any investment vehicle. There is a risk of loss involved in all investments.

BY MAULDIN ECONOMICS

Although a number of well-known hedge fund managers such as Kyle Bass and George Soros have publicly stated they believe some kind of a “hard landing” in China is coming, not everyone agrees.

Mark Yusko of Morgan Creek Capital is not in the China “hard-landing” camp. He says while the Chinese economy is facing a number of headwinds and risks as it tries to adjust to a consumer-based model, the authorities are wisely taking a balanced, long-term view.

He thinks there is a minimal risk of serious economic problems in China in the next few years.

The Western Media Is Hyping China Problems

Yusko says the biased reporting of American and European media has created major misperceptions about China on Wall Street and among the general public.

According to Yusko, the Chinese government has recently had to take a number of steps to rein in corruption and minimize asset bubbles, and this does have short-term macroeconomic consequences. He believes the Western media is doing its best to make a mountain out of what is really no more than a mid-size molehill.

Yusko offered his point of view on the Chinese economy in a recent interview with Mauldin Economics. “There have been worries about the renminbi and capital flight… I just think people are blowing out of proportion what is actually happening.”

Of interest, Yusko also suggests that while Chinese stock markets are cheap, his firm focuses more on investments in private Chinese companies. That allows them to vet the management more thoroughly, which significantly reduces the risk of fraud or corruption.

China’s Long-Term Goal Is to Make Renminbi a Gold-Backed Global Reserve Currency

Chinese policymakers are taking a long-term perspective. Yusko thinks their primary long-term goal is turning the renminbi into a global reserve currency.

He goes on to say Chinese government is looking to gold to help stabilize the renminbi and create a global reserve currency to compete with and eventually even supplant the US dollar.

According to Yusko: “Quietly, since 2013, China has become the world’s largest gold market… the PBOC (China’s Central Bank) has been buying massive amounts of gold. I believe they are moving toward a partial gold backing of the renminbi.”

Chart by www.goldchartsrus.com

Yusko, therefore, thinks that worries about a large-scale devaluation of the Chinese currency in the near future are misplaced.  He believes that the Chinese government will eventually set up a stable, “safe” currency system where the renminbi is around one-third backed by gold.

He also points to the fact the Chinese are now true global market makers for the gold market as the government has finally authorized the pricing of gold in renminbi.

“As of April 24th, the Chinese Mercantile Exchange will now price gold in renminbi. That is a huge, monster development.”

Will China Muddle through?

China has always been a conundrum. Whether you are in the “hard-landing” camp with Bass and Soros, or agree with Yusko that the Middle Kingdom will “muddle on through,” it is clear that the next year or two is a crucial transition period for the Chinese economy.

We’ll soon know if conservative economic policy and all the gold China has been hoarding will be enough to make the transition without a major hiccup.

Watch Mauldin Economics’s full interview with Mark Yusko (5:56) below for more:

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In the past couple of years, China’s slowing growth has sold numerous headlines, but another less told story is that of the mounting debt the country is taking on to fight the “hard landing.” By some estimates, China’s total debt is estimated to stand at some $28 trillion, which means it’s nearly quadrupled over the last five to six years. You don’t have to be an economist to see that as an ‘alarming rate.’ Nevertheless, with the state owning large portions of the debt and a debt to GDP ratio just under 300%, it’s actually quite manageable and could be eradicated if China decides to shrink the balance sheet. That’s not likely to happen anytime soon, as the growing debt has been part of China’s effort to keep the economy stimulated. This story is something to keep an eye on, but in our view it still doesn’t warrant sounding the alarm. 

FREE Download – Zacks Economic Outlook: May, 2016

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Steady Investor’s Week

Good News for Chinese Markets? – Chinese equities markets have been plagued by several factors, but one of the more notable ones, in our view, is the constant government meddling. First, there was the unannounced currency devaluation of around 5% last August (and another to start the New Year), and then there was the “circuit breaker” fiasco where a mechanism was implemented in equities trading to halt trading following an intraday decline of more than 5% (it failed miserably). Markets do not like to be meddled with and they especially do not like ‘surprise meddling.’ But, news this week emerged that the government is replacing Xiao Gang, who was formerly China's securities trading chief.  Maybe getting rid of the ‘bad apple’ will help un-spoil the bunch.

British Pound Takes a Pound(ing) – Britain has found itself in a rather precarious situation as it weighs whether it should remain in the European Union. Just to clarify, Britain’s membership is in the European Union – not the euro zone. The former is a unification treaty that allows for visa-less travel and open trade and labor markets – generally a good thing for capital markets and the economy. The latter (euro zone) is the currency bloc that operates under the euro and the European Central Bank, and Britain is not a part of that. Over the weekend, the British Prime Minister announced a referendum set for June 23 to vote on whether Britain stays in the union or not. Most business leaders agree that Britain should stay – isolating itself from the greater European economy would likely lead to rising costs through new trade barriers and would hurt exports. The currency, however, would potentially sustain notable collateral damage as a result of departing the European Union. A Bloomberg survey discovered that most economists believed the pound could fall to $1.35 as the vote nears. The sterling has already been bruised as fears mount over the decision, having dropped to its lowest level since March 2009 to a little under $1.40.

Meanwhile, in Greater Europe – activity in the manufacturing and services sectors hit a 13-month low in February as the euro zone composite PMI index dropped to 52.7 from 53.5 in January. This reading still signals solid expansion, which many media outlets failed to appreciate since February figures widely missed estimates and since these “13-month” lows come amid pronounced market volatility. Even still, the market took the ‘disappointing’ data as a good thing since it means that the European Central Bank may take action to stimulate the economy further in March. This reaction – when the market moves higher on disappointing news – is very similar to how U.S. markets reacted from 2011 – 2013 when the Fed considered, and eventually implemented, QE3.

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Past performance is no guarantee of future results. Inherent in any investment is the potential for loss.

Happy Chinese New Year! I wish you all a prosperous Year of the Monkey in 2016. This time on the calendar is usually rather bullish. As you can see in the following table, the three trading days before and the trading day after have a solidly bullish track record on the Hang Seng going back to 1980. The fact that the Hang Seng was positive today and yesterday is somewhat encouraging considering how far off track the Hang Seng has gone already this year.

Usually the Hang Seng enjoys a solid rally in the 30 trading days leading up to the New Year break and corresponding celebrations. However, this rally has clearly been absent this year. In the following chart the performance of the Hang Seng Index, DJIA and S&P 500 have been plotted. Hang Seng’s performance over the last 30 trading sessions has been plotted separately.