Chinese Stocks Look Ready to Pop

10/11/2010 11:42 am EST

Focus: GLOBAL

Paul Goodwin

Emerging Markets Specialist and Analyst, Cabot Heritage Corporation

The index representing Chinese issues in the US is poised to break out of its yearlong trading range, writes Paul Goodwin in the Cabot China and Emerging Markets Report.

The Halter USX China Index, which is the basis for the Cabot China-Timer, is behaving better than it has for months, soaring towards the 5,900 level that presented such staunch resistance in January and April. This admirable up move comes after a period of 14 months when the Halter Index (which tracks the performance of all Chinese American Depositary Receipts) traded in a range, with resistance at 5,900 and support at 5,000.

So, the obvious focus for one part of our attention right now is how the index performs as it approaches this long-term resistance level. If the index can finally break through 6,000, it will mark a real milestone—a decisive breakout from any 14-month range would indicate genuine strength.

But the major part of our attention will still be settled, as always, on the performance of the stocks in our portfolio.

If you have a portfolio with the wrong stocks, it’s possible to have a strong market and yet make no money. Conversely, you can make money in a down market if you have the luck or skill to pick the right stock(s).

But the general rule is that growth strategies make money when stock markets are in up trends. The tactical basis for Cabot China & Emerging Markets Report is moving towards fuller investment when markets are in an up trend and reducing exposure when markets are declining.

Market bottoms are also the moments of greatest opportunity, with stocks trading at huge discounts and quality issues beaten down into the mud. Investors who can resist the tide of negativity can get back into equity markets months before their depressed friends can even think about it.  If you believe in “buy low, sell high,” you’ve got to love the lows, right?

Conversely, of course, when elated investors are bidding up a huge number of stocks to new highs, investment advisors want you to control your enthusiasm and be on the watch for signs of a market reversal.

So, as we root for the Halter Index to break through to 6,000, marking a new multi-year high and taking our stocks with it, we will also keep a small portion of our market radar trained on the big picture.  

The up trend we’re in now comes after a long period of sideways trading and should have plenty of fuel for a long rally. And we’re nowhere near seeing the widespread optimism in investor sentiment that marks the maturation and ultimate decline of a bull market.

But part of becoming a great growth investor is learning to avoid extreme emotions, in either direction. And as we head towards what might be the strongest bull run in years, it’s always a good idea to hone your balance skills.

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