An explanation on what are 'peaks' in a bull market

Thursday August 6, 2009
An explanation on what are 'peaks' in a bull market



IS it time to bail out of the China and Hong Kong stock markets? Are they too frothy already? iCapital says “not by a long shot”.

For one, investor sentiment is still extremely weak and nervous, despite the rally seen in numerous stock markets.

After rising 100% in nine months, the Shanghai Composite index this week plunged 5% in a single day, making investors all nervous and worried that the Chinese government is about to start tightening and cause a hard landing. This is how fragile the current sentiment is.

Peaks in bull markets are made when the markets are unable to continue rising even in the face of continuing positive fundamental news.

Now the situation is such that investors keep buying and worrying that the fundamentals do not improve or would not sustain.

Second, while bank lending in China has been surging, the broad Chinese economy is still not on a sound broad recovery footing. The Chinese government knows that bank loans cannot keep expanding at the current rate.

The leaders and policymakers know that they are navigating a very difficult situation. Too loose a monetary policy for too long a period, China may have an asset bubble in equity and property prices. Too tight a policy too early, one may prematurely short-circuit the current recovery momentum.


China recognises this delicate situation and is also very aware that foreign parties know the fragile state China is in and are ever ready to exploit this to destabilise China.

However, the leaders and policymakers have plenty of experience in handling such types of tight rope situations.

Unknown to most people, China’s unemployment rate has been rising for the last 25-30 years (see chart), thanks to the endless and relentless restructuring of the Chinese economy.

Millions of workers have been retrenched as state-owned enterprises and other organisations restructured. Even the People’s Liberation Army had to downsize.

In view of the restructuring process, the leaders are extremely sensitive to the labour market conditions and are very experienced in handling such delicate affairs. For now, the external demand for China’s products remains weak.

The reliance on domestic sources of growth is of paramount importance. And this will continue to be the case until convincing signs appear that it is time to cool things down.

Many analysts caution on the present market rally, saying that it is all liquidity driven. Meanwhile, the rest of the world is showing more signs of recovery.

Soon, it will be green fields everywhere. When this happens, the depressed earnings will surge and the equity market valuation will look less expensive then.

The same applies to the Hong Kong stock market. Even the initial public offering market is just beginning its frenzied phase.

Even though the Hang Seng index has rallied strongly since its bottom in October 2008, the bull market is still young. No bull market has died at such a young age.

http://biz.thestar.com.my/news/story.asp?file=/2009/8/6/business/4461929&sec=business



Related:

Bubble Trouble
http://myinvestingnotes.blogspot.com/2009/06/bubble-trouble.html

Bubbles and bear markets are two separate and distinct things. Investors truly need to understand the differences. You need to understand which strategy to apply when, and not use a hammer when you need a screwdriver. Once you see the straightforward differences, you will know what to do.