Chinese economy reaching bottom, paving way for bull

An end to the decline could allow market's to find new life

Here at the Forecaster we take market psychology very seriously. Not only that, we take it one step further and attempt to marry the technical picture to the prevailing sentiment. We like climbing markets on worry and don’t like declining markets on complacency. The former means the rally will extend and the latter translates to a bear that will extend as well. What you don’t want to see are markets climbing on complacency but do want to see them dropping on fear. That will give you a good idea as to the current state of affairs.

We always take a special interest in our new friends to the East. The US and to a greater extent Australia are tied to the hip with China. I wonder if this is what Richard Nixon and Henry Kissinger really had in mind.

In a story by Bloomberg, I saw a major shift in the wind concerning China were statements by JP Morgan Chase chief Asian strategist Adrian Mowat. He stated, “China is in a hard landing. Car sales are down; cement production is down; construction stocks are down. It’s not a debate anymore, it’s a fact.” I like it. In fact it’s the first good news I’ve heard about the Chinese economic condition in a long, long time. Keep in mind, markets are perverse mechanisms where if you truly understand contrarian psychology you learn to wire your brain in such a way that bad can mean good and good is not necessarily the best recipe.

This is the first time we see a shift in the wind concerning the sentiment in China, which up to this point everyone was in agreement there would be a "soft landing."’ We’ve discussed this finer point in these pages numerous times over the past year so you know where I stand. Concerning the progression of the Chinese bear market, this represents a sea-change in attitude and greatly accelerates the process of bringing it to a conclusion. Chinese officials and people who analyze China are starting to see the light and are no longer in complacency or denial. Although any leg down can be painful, and please don’t misinterpret what I am saying. I don’t like pain for anyone as we all just went through the debt ceiling debacle, MF Global and even Greece.

However we need to get to reality for the Chinese economy to ever recover and put the chart back in a bull market. Now here’s the other secret. The SSE doesn’t necessarily have to get to new lows of a washout in order to turn up. It might have to go back down but as we saw with our own markets last year, we had that washout and didn’t get anywhere near the 2009 lows. If you get nothing else out of this discussion realize it’s the psychology that dictates how far a market will fall.

In an unrelated development, according to a CNBC report, the Miami condo market is turning up again as foreign buyers flock in from South America, Russia, China and Europe. Twenty five new towers with 5200 units are planned as there are only 4200 unsold units left from the crash years. The bottom line is foreigners are taking advantage of a lower US Dollar and coming in with cash, bypassing all of the regulations and tight lending standards of US banks.

We knew something like this had to happen given the much improved state of the HGX. These charts of ours are the single best forecaster of economic activity in the world. The year has been characterized by housing and banking sectors on a tremendous roll. I told you on January 1 that it was time. The HGX has done even better than I would have hoped for. We are at the end of the first quarter and the price action has blown through longer term resistance. Another takeaway is the government can do all they want with stimulus and it won’t necessarily work simply because markets are self-correcting mechanisms. Banks still aren’t lending but it’s the foreigners coming in with cash. The chart of the week once again is housing. I doubt we go straight up from here as this week could finally be the week we get a reaction. However, this chart turned a week after the general market in 09 and is coming to its own 161 window.

Apple computer is also on a tremendous roll and I think that’s a bubble.

The other big story of the week was the continued surge of the stock market, prompting one Tweeter to observe, “It’s going to take a nuclear war to bring this market down!” Patience I told him, we don’t need nukes, just Gann as we come into the all-important seasonal change point as we get to the Gann master timing window next week. What is interesting about this market is stock based mutual funds have seen an outflow of $1.2 billion since the start of February even though those funds have returned 9.8% since the start of the year. Also corporate insiders sold off $6.8billion in February. The most in 11 months and 13 times the level of insider buying according to CNBC.

Next page: What the surveys say

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