Wednesday, July 8, 2015

Elliott Wave Stock Market Update - July 8

This is the third  attempt at breaking support this week and with a little help from Greece (and now China), we might just see that Head and Shoulders complete. But so far every low has been a slightly higher low in an oversold market and we might get a decisive move by the end of the week. Perhaps once the uncertainty over Greece and the stock market in China is done, we'll finally see the end of the correction. At least with Greece, we'll know by Sunday. China on the other hand is another story as it might continue to go lower due to panic selling.

There has been a lot of media attention on China's market lately, specially now since it looks out of control. But the low yesterday was actually right on its 200 DMA and barely above its W1 label of 3,404, so there might be an equally out of control rally if these levels holds. But I wanted to write about the bigger picture of the Chinese market since I've been fully invested in it for years. It might seem irrational to invest in a slowing communist economy and specially now since it seems obvious to almost every writer that it is a "bubble". But I think it remains undervalued and underestimated, even by their own citizens.

First, I wanted to make clear that I am invested in Chinese stocks because of their value so I am a "buy and hold"  investor and not a trader. Secondly, I view stocks as ownership of a business and not as a way to speculate like I do with oil or volatility. Lastly, I believe there is an undeniable correlation between the size of an economy and the size of its stock market.

To make my point,  I'll go back all the way back to when China created its stock market back in 1990 when the SSEC started trading at 100. At that point, China's economy was 1,877 trillion RMB (302 billion in USD). In the last 25 years, China grew fast at a rate of about 10% a year and as of last month its economy stood at about 67,000 trillion RMB or 10.8 trillion USD which translates into a multiple 35.7X the size of its 1990 economy of 1,877 trillion. If we use that same GDP multiple to what the SSEC started trading at in 1990, we get 3,570 and that compares to the now "crashed" market which closed at 3,506 yesterday. So on average, the stock market in China has grown about 1:1 to its GDP growth rate as of today. The issue however is company profits don't grow at GDP growth rates, larger companies are able to grow profits faster than GDP because of economies of scale and the fact that Chinese companies have benefited disproportionately from globalization. But this trading premium is not being reflected yet on its markets, which makes them undervalued. Obviously, what that extra premium is, is the million dollar question. To get a better sense of what the possibilities are, I broke down the numbers for the US economy and its markets. During the same period, the US grew its economy from 5,979 trillion USD in 1990 to 17,701 trillion USD today or a multiple of 2.96X. The S&P 500 closed 1990 at about 325 and today it closed at 2046 or multiple of 6.29X or basically more than double its GDP growth of 2.96X. If the S&P 500 reflected a 1:1 ratio like China, it would trade at 962 today. So that premium from economies of scale and globalization is obviously present in the US, whether the market is overvalued in the US is another question but if China were to trade at the same premium, the SSEC would be trading at 7,586. Which would parallel the Domestic Market Cap to GDP ratio of the US at 130%.

So, despite all the drama and volatility in China, things will eventually settle down and the bull market will continue again as its economy continues to grow. This is the same exact reason I've been saying the US market will continue to go up as long as there is GDP growth and why traditional Elliott Wave Theory provides wrong assumptions in very long time frames. It's common sense to me, as the numbers show.

For further analysis on the NASDAQ, DJI, RUT, Gold, Silver and Oil please visit

Short Term Trend = Bearish
Medium Term Trend = Bearish
Long Term Trend = Bullish

* Trends are not trade signals. Trends are posted for situational awareness only and does not take into account wave counts, technical or fundamental conditions of the market.

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