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Understanding Market Emotion As China Fear Jumps



March 20, 2012 – Comments (3) | RELATED TICKERS: SPY , AAPL

The markets are trading lower today after worries on the Chinese economy surfaced once again. A Chinese slowdown has been long talked about but has had little effect on the massive rally in U.S. equities. The SPDR S&P 500 ETF (NYSEARCA:SPY) is trading at $140.00, -0.88 (-0.62%).

What is the reason for this shift in market action? Why does talk of a slowdown in China mean something while the last ten times it had no effect on the markets?

Simply put, human bullish emotion has reached a top. Think of the ocean and the tides coming in and going out. As emotion sways one way, it will ultimately reach its peak and slowly start to shift the other way. This is the motion of emotion. Based on the effect of the China news today, this shift has started.

The slight shift in market mentality can be seen in Apple Inc. (NASDAQ:AAPL). Over the last week, AAPL shares have had a tough time breaking through the $600 level. Today the stock is trading at $597.29, -3.81 (-0.63%).

Gareth Soloway

3 Comments – Post Your Own

#1) On March 20, 2012 at 12:48 PM, ETFsRule (< 20) wrote:

Time to go all-in on China stocks. China has underperformed the US markets for the past 5+ years, largely due to irrational fears. That kind of trend can't last forever.

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#2) On March 20, 2012 at 2:28 PM, Valyooo (33.89) wrote:

What do you mean irrational fears?  The ghost cities are frightening, the ADR's are frauds, the growth is slowing down, the currency is a mess...I don't think that is totally irrational.  In fact I think it is irrational how much people seem to love Chinas economy.

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#3) On March 20, 2012 at 7:13 PM, ETFsRule (< 20) wrote:

"The ghost cities are frightening"

They're just planning ahead.

From 2010 to 2025, it is estimated by the Ministry of Housing and Urban-Rural Development that 300 million Chinese now living in rural areas will move into cities.

Think about that - 300 million people moving into cities from the countryside! And that doesn't even include immigrants, or people being born into those cities.

Basically, China's situation is equivalent to finding a new home for every man, woman and child in the United States - in 15 years.

Housing prices in China might need to come down a little bit (or at least stabilize, while incomes continue to rise). But, filling those cities will not be a problem.

"the ADR's are frauds"

Some were frauds, but I'd wager that 99% of the frauds have already been exposed. That's why you don't hear much about frauds anymore. Even Carson Block is now talking about going long on China stocks.

"the growth is slowing down"

8.9% GDP growth isn't exactly slow, especially with only 3.2% inflation. And the slowdown was done by design - they raised interest rates 5 times in a span of 12 months. They'll start picking up steam again soon.

China says conditions ripe to liberalise interest rates

"the currency is a mess"

That's a very vague criticism, and it could be applied to any country in the world, depending on your viewpoint.

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