Stocks in China, Brazil climb but is this the end of the emerging markets correction?

01/28/2010 9:44 am EST


Jim Jubak

Founder and Editor,

Stocks in China closed up today, January 28, in Shanghai and Hong Kong, breaking a six day losing streak. Shares of other emerging markets were ahead at noon in London. The MSCI Emerging Markets Index was up 1.3%. Six straight declines have taken the index down 9.7% from its 2010 high.

In Hong Kong the Hang Seng Index closed up 1.6%, ending a six-day drop that totaled 7.6%. That decline had taken the index 13% below its November 16 high. The Hang Seng climbed 52% in 2009.

Stocks of big Chinese banks that have taken the brunt of the damage from a government decision to rein in bank lending were among the biggest gainers.

Given all the damage done in the correction to Chinese stocks, it’s hard to say that the January 28 move amounts to a reversal.

 The FTSE/Xinhua China 25 Index, which is tracked by the iShares FTSE/Xinhua China 25 ETF, broke below its 200-day moving average on January 26, for example. (The FTSE/Xinhua ETF (FXI) is on my watch list. You can use my new tool, Jim’s Watch list to follow its price.)

Some traders in Hong Kong and Shanghai are calling this a technical bounce rather than an end to the decline. In Hong Kong, for example, the decline took the 14-day relative strength index on the Hang Seng Index, a widely followed technical indicator in that market, to 26 yesterday January 27. Many traders use a reading of 30 as a signal to buy and that certainly contributed to today’s advance.

In Shanghai the composite market index is flirting with the 3,000 level. There’s decent technical support at 3,000 so that the market could stay at this level for a few days. But the support isn’t strong enough to mark a definitive bottom.

In short, the decline has brought many markets—especially China and Brazil—to attractive levels. But the risk of further declines has by no means been eliminated.

But then again, if the risk had disappeared, prices would be much higher, no?

I’ll post on China and Brazil again later today.
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