The Shanghai Stock Exchange Composite Index analysis for August
The index is likely to rely on monetary policy and fiscal stimulus to continue growth
The SSE Index surged higher in early July but has given back some of its gains mid-month. The exuberance of a rebound in economic activity lead to a surge in speculative buying that was likely driven by retail investors. Also, the Chinese June economic data that was released in mid-July showed mixed results with growth rebounding more than expected but consumer purchases slowing.
Historically the returns on the Shanghai index are lower in August. Will it be the case this year? Let’s see what the charts suggest.
Chinese economic data
The rebound in the Shanghai index was likely driven by expectations that economic growth would be better than expected. As the Chinese gained control of the spread of Covid-19 sentiment has improved. China reported better than expected Q2 GDP which increased 3.2 per cent compared to expectations that it would rise by 2.4 per cent. Unfortunately, the path forward could be compromised by a lingering trade war between the US and China.
Consumer spending was worse than expected in June according to official Chinese data. Retail sales declined 1.8 per cent year over year versus expectations that would rise by 0.5 per cent. Additionally, Industrial production was in line with expectations rising 4.8 per cent year over year in June versus a 4.4 per cent rise in May. The fate of economic growth in China will likely rely in monetary and fiscal stimulus.
The seasonal pattern is negative in August
As opposed to many other large country equity indices, The Shanghai index was not near an all-time high in early 2020. The trade war with the US took a toll on Chinese output. While stocks dropped nearly 15 per cent during the Q1 of 2020, the SSE Index has rebounded and eclipsed the January highs. As of mid-July, it was up nearly 8 per cent for the month and 4 per cent for the year.
Historically, the Shanghai index experiences negative returns in August. During the past 10 years, the Shanghai index has been down 50 per cent of the time for an average loss of 1 per cent.
The SSE Composite Index technical analysis
The Shanghai index broke out above trend line resistance and eclipse the January highs. The recent selloff has reversed short term momentum which has turned negative in overbought territory as the fast stochastic generated a crossover sell signal. The current reading on the fast stochastic in mid-July is 84, above the overbought trigger level of 80, which could foreshadow a correction. The RSI also reversed after closing in overbought territory. Medium-term momentum remains positive as the MACD histogram prints in the black with an upward sloping trajectory which points to higher prices.
The bottom line
The Shanghai index is likely to rely on monetary policy and fiscal stimulus to continue to gain traction. The rapid rise in the index has been tempered by authorities that have tried to reduce exuberance. The seasonals are generally negative in August and short-term sentiment indices have turned negative. Growth indicators are mixed, with GDP and retail sales pointing in different directions. Look for the Shanghai index to consolidate in August, during choppy market conditions.
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