China’s Stock Market Crash: Is The End Near?

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After a bloody day in the Shanghai Composite and the rest of China’s stock market on Monday, it’s hard to believe there’s an end in sight. Indeed, the market continued to crash today, spilling Black Monday over into Tuesday. However, some analysts believe an end to the bloodbath is not far off.

Janney analyst Dan Wantrobski pointed out a number of features China’s current stock market crash shares with the 1999-2000 U.S. tech bubble, while HSBC Global Research analysts Ben Laidler and Daniel Grosvenor looked at the 16 stock market corrections which have happened since 1998.

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Major U.S. stocks rally today

On Monday, widespread worries about Chinese stocks sent ripple effects through the world's other major stock markets, dragging down popular names like Apple and Netflix. This morning things are looking better in other markets despite China's continuing crash. On Monday, U.S. stocks declined 1,000 points at the open, an unprecedented move. The Dow Jones Industrial Average closed with loss of almost 600 points.

But Apple shares rallied today following a flood of analyst reports who chided investors for their bearishness on the stock and positive commentary from CEO Tim Cook about the company's China business. After closing down 2.5% at $103.12 per share on Monday, Apple stock climbed as much as 5.51% to $108.80 per share in premarket trading. Netflix also rallied this morning in premarket trading, climbing as much as 9.16% to $105.75 per share after closing down 6.81% at $96.88 per share on Monday.

Europe, other Asia markets recover

Throughout the rest of the world, stock markets are also recovering. South Korean and Australian stocks ended their trading day in the positive after starting in the red. Japan shares struggled however, with the Nikkei declining 4% today.

Some of Europe's major stock indexes climbed more than 2% in morning trades after posting a 5% decline on Monday, helped by positive macroeconomic data from Germany, according to CNN Money.

Shanghai Composite decline compared to U.S. tech bubble

But when will the global recovery spread to China's stock market? That's the big question up for debate on Wall Street today. Janney analysts overlaid the current Shanghai Composite Index over the NASDAQ Composite Index between 1999 and 2000 on Monday to demonstrate how it looks like China's crash could be over soon. They found an "extremely tight" overlay, "both in magnitude and duration."

The Shanghai Composite fell 8% on Monday, but correlation with the tech bubble suggests the crash might be over soon, according to Janney analyst Dan Wantrobski. He thinks it's likely that a 3500 break is on the horizon with near-term support in the Shanghai Composite in the 2800 to 3000 range. This target would mean about a 42% to 46% decline from recent all-time secular highs. However, it would still be short of the 1929 Down and 1999 NASDAQ declines, which were closer to -70%.


Wantrobski expects the Shanghai Composite to pass into an oversold rally, although he still thinks investors should avoid China's markets for now.

China stocks close to their bottom?

HSBC Global Research analysts Ben Laidler and Daniel Grosvenor also see an end in sight for the correction of China's stock markets. Here's a look at past corrections for the MSCI AC World TR Index since 1988:


Unlike Wantrobski, however, they say the risk/ reward to buying "appears favorable." In general, they say corrections in Energy and Staples "have overshot verses historical corrections, and IT and TMT outperformed compared to past downturns. Here's a look at past corrections by sector:


Looking at individual markets, they believe the "most resilient" are Japan and the U.S., but they are also the most concerned about these two markets over the medium term. They're Overweight on Europe, excluding the U.K., and Emerging Markets, Neutral on Japan, and Underweight the U.S. market.

All charts/ graphs for the last section of the article are courtesy HSBC.


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