China Breakout to Drive Melt-Up?

By Michael A. Gayed  DEC 05, 2012 11:45 AM

The surge in Asia seems to suggest that bets are increasing on a return of export growth. Such a move may be long overdue.



We herd sheep, we drive cattle, we lead people. Lead me, follow me, or get out of my way.
-- George S. Patton
It appears that out of nowhere, markets worldwide are showing solid strength in the face of ongoing fiscal cliff concerns and ongoing negativity toward Europe. Market resiliency can not be denied, with every mini-correction only resulting in a short pullback, followed by a melt-up-like move as occurred after the April-May period earlier this year.  Our ATAC (accelerated time and capital) models used for managing our mutual fund and separate accounts positioned into equities last week, and barring any kind of major near-term deterioration, appear poised to rotate next into emerging markets.

The surge in Asia seems to suggest that bets are increasing on a return of export growth.  Such a move may be long overdue.  Take a look below at the price ratio of the iShares FTSE China 25 Index Fund ETF (NYSEARCA:FXI) relative to the S&P 500 (NYSEARCA:SPY).  As a reminder, a rising price ratio means the numerator/FXI is outperforming (up more/down less) the denominator/SPY.

It is no surprise how poorly China has performed, really going back all the way to 2009.  It appears a bottom took place in September relative to the US, as bullishness crept in on the recent leadership change and the potential for future reform.  The spike that occurred last night appears to have resulted in a breakout-like move which may signal further outperformance to come.  I suspect a run to the 0.3 level in the weeks ahead could occur as money rotates out of the US in favor of higher growth emerging economies.  If this occurs, China which is a significant driver and indicator of global growth could pull bulls deeper into the market. 

And so the risk of missing another melt-up may be higher than most think...

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