Study: short term bullish case for Chinese stocks and emerging markets


I pay attention to China’s stock market because it is symbolic for the entire Emerging Markets family (emerging markets economic growth is primarily driven by China).
China’s stock market and emerging markets are crashing. RSI is a technical indicator that measures how oversold or overbought a market is.
As you can see in the following chart, China’s weekly RSI (a medium term indicator) is the most oversold its been since 2012.

EEM is the emerging markets ETF. Its weekly RSI is also pretty oversold.

Here’s what happens next to China’s stock market (Shanghai Index) when its weekly RSI falls below 30 for the first time in 3 months.

Click here to download the data in Excel.

Conclusion

As you can see, China’s stock market tends to make a 1 month bounce after its weekly RSI becomes as low as it is right now. China’s stock market went up 8 out of 11 historical cases 1 month later.
There were 3 out of 11 historical cases in which China’s stock market went down 1 month later. All 3 of those cases were¬†small losses, the “largest” being -1.22%
This suggests that in the next month, China’s stock market will either bounce or swing sideways. This means that the short term downside for China’s stock market is limited.
Since the Chinese stock market and emerging markets tend to move together, this suggests that emerging market stocks will bounce in the short term as well.
*This study tells you nothing about what China’s stock market will do in the medium term or long term. It only suggests that China’s stock market will bounce in the short term.
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