Shanghai Continues its Surprises

We have a very strong bull market on our hands. It has been led by the Shanghai Composite and we have chronicled the recent travails and triumphs of that bourse as it has moved through a correction and back into an uptrend over the last month and a half.

We have noted that it is small and restricted and thus volatile. Far more so than more mature markets. We have also noted that the US market might have to resume leadership of its own accord and it has acted of late as though it could carry the burden. This week could well tell the tale.

Since the last time we discussed the Shanghai Composite’s resumed uptrend trading has turned rather stormy. It has encountered a day of high volume churning, which is subtle distribution as selling into strength masks underlying weakness, and two days of outright higher volume selling.

Friday’s action was particularly disturbing as the index plunged more than 3% closing not far off its lows.

Today the composite mounted a reversal, although we won’t have volume figures for several hours so we do not yet have a handle on whether today’s action represents conviction or just an oversold bounce.

We were encouraged Friday when our markets didn’t follow Shanghai lower. But whether our markets react or not it is important to remember that volatility during a rally is to be expected and even welcomed as it can set up new buying opportunities and pullbacks in winning holdings that justify adding to positions. The rally is now remarkably distribution free and we would view declines, which we expect to be constructive, as buyable events.