Trading The Red Index: The SSE180

The streets of Shanghai may have been filled with Chinese dragons and raucous celebrations for a week, but the SSE 180 index was not a recipient of any of that fanfare. In fact, the SSE 180 has plunged from 6912.07 on 14 January to its current level of 6334.76. That represents an 8.3% drop in the space of 1 month. The 52-week trading range for the Shanghai Composite index is 6,077.52 on the low end and 11,815.51 on the high end. That the year-to-date return is worse than the 1-year return is remarkable given that we are barely 2 months into the New Year. If one looks at the performance of the SSE 180 over a period of 1 year, it appears as if things are completely negative. Averages are down for the year-to-date and for 1 year, but if we look beyond that time period, and go back 2 years it is clear that the index is still 31% higher today than it was two years ago. That shows exactly how robust the Chinese economy was that it has endured multiple unrelenting barrages and is still significantly above its levels from 2014.

On the face of it, every trader knows that the current volatility that we are witnessing is largely the result of China weakness. It is no secret that Chinese stocks are heavily overvalued, and the current corrections taking place on the Shanghai Stock Exchange (SSE 180) are an attempt to deflate those figures. It should be pointed out that the Chinese stock market has been closed for 1 week from Monday, 8 February until Monday, 15 February for Lunar New Year. However, the break did precious little to quell investor anxieties. Shares on the Shanghai Stock Exchange are still heavily overvalued, especially when compared to other emerging market economies. According to analysts, there is a 34% premium on Chinese stocks over those of its EM partners.

So what happened in the week that Chinese equities were effectively offline?

Anxiety among speculators remained and mass selloffs of equities ensued. Of course, bearish speculative behaviour cannot be apportioned at China’s doorstep all the time. In the week that was, we have seen global sentiment sour against financial stocks, led in part by the resentment towards the actions of central banks. Further, crude oil prices have been plummeting. Combined, major averages have reflected this bearish sentiment and are reacting accordingly. Perhaps the most important change that took place recently is confirmation that the MSCI ACWI (All Country World Index) has now officially met the requirement for bear market territory – 20% declines from its high within the past year. This does not bode well for global confidence, and it is certainly going to weigh heavily on the minds of policymakers at the Federal Reserve Bank when the March meeting is held.