The China Bounce


If you want a good illustration of how quickly the stock market can digest bad news and beg for more, you just need to look at what’s happening with Chinese stocks.

A little over a month ago, on September 28, the PowerShares Golden Dragon Halter USX China ETF (PGJ)—which represents the performance of all Chinese stocks that trade on U.S. exchanges—closed at 24.6, retesting its late-August low at 24.8. That September 28 close represented a 27% correction from the Golden Dragon’s June 17 high at 36. At that time, headlines were trumpeting the slowdown in the Chinese economy, the apparent powerlessness of the government to stimulate growth and the global gloom engendered by the Greece crisis (if any problem that goes on for more than a year can be called a crisis), the Fed and general chaos around the world.

In fact, there are still plenty of headlines about all of the above problems. The Fed has yet to begin raising interest rates because they’re concerned that China’s economic problems might prove to be a drag on global growth. The European Central Bank says that Greek banks need 14.4 billion euros to “get back on track.” Russia is still, well, not playing nicely with others and military matters in Syria, Iraq, the East China Sea and elsewhere seem to be taking up a lot of investors’ mental bandwidth.

Given all that, why does this six-month chart of PGJ look so good?

The rally that began in late September is now in its sixth week, and we have noted that stocks from the strongest growth industries in China are leading the rally. We are seeing big rallies in e-commerce stocks, online gaming and mobile search. What they all have in common is that they are businesses conducted almost exclusively via mobile devices, the overwhelming choice for Chinese who want to access the Internet, shop, play games, visit social media, get news and send messages.

If you ever needed any proof that markets can eat and digest a ton of bad news and stay hungry, this is it. Yesterday’s horrifying China headlines have been read, analyzed, priced into the market and essentially forgotten about.

That’s a little less the case with the rest of the emerging world. When you look at iShares MSCI Emerging Markets (EEM), you see a bounce beginning in late September, just like PGJ, but that move has leveled out after just two weeks and EEM has been trading sideways under resistance at 36. The performance has been good enough to keep our buy signal intact, but it looks like investors are finding more stocks to love inside China than outside.

The bottom line is that we are in a situation where having strong predictions about where the markets are going isn’t much help. Conversely, for market followers like us, the situation is ideal. We follow the leaders that the market gives us. It’s working.

This is an excerpt from Cabot Emerging Markets Investor, which seeks to capitalize on the enormous potential in emerging market countries. Chief Analyst Paul Goodwin has been a researcher and writer for over 30 years and a member of the Cabot investment team since 2005.

Subscriber comments on Cabot Emerging Markets Investor

Paul Goodwin can be found on Google Plus.

Stock Picks


This stock could rise 50% before becoming fairly valued.

This hot technology company is growing like a weed, thanks to products that speed up cloud communications.

This stock is somewhat well known, but far from well loved.

Cabot Wealth Advisory

Nine Characteristics of Great Growth Stocks

By Timothy Lutts on October 24, 2016

Recommending great growth stocks is our specialty at Cabot. But so is education--we want you to be able to find growth stocks on your own too. Here are nine characteristics of what to look for.Read More >

How to Find Great Growth Stocks in a Scary Market

By Paul Goodwin on October 21, 2016

Even in today’s scary market, there are great growth stocks out there. Here’s how to find them—and how to avoid the kind of losses that can haunt your portfolio.Read More >

Buy This Small-Cap Tech Stock as the Nasdaq Thrives

By Tyler Laundon on October 20, 2016

Technology stocks are thriving, as the Nasdaq has been outpacing the S&P 500 and the Dow for months. And one small-cap tech stock in particular is outperforming the industry’s big boys. Read More >