Chinese Stock Rally Triggers Short-Term Exhaustion Signal

(Bloomberg) -- The post-Christmas surge that drove Chinese stocks into a bull market may have reached a short-term peak, according to Sundial Capital Research Inc.

More than 70 percent of Shanghai Composite Index members are now trading above their 200-day moving average, up from below 20 percent at the end of January, which has often marked an exhaustion point in past rallies, according to an analysis from Sundial founder Jason Goepfert. All six times this has happened in the last 17 years, the benchmark gauge has shown a negative return either one or two months later, he said.

Chinese Stock Rally Triggers Short-Term Exhaustion Signal

“Now, more than 70 percent of stocks in the index are in bull markets, roughly defined as trading above their 200-day averages,” he wrote in a report Tuesday. “When that figure has gone from below 20 percent to above 70 percent, it has often marked the exhaustion point for the initial rally.”

Still, the more than 20 percent rise in Chinese shares in recent months bodes well for more gains in the longer-term, Goepfert said.

The Shanghai Composite Index soared 24 percent since January 3 as optimism over a potential U.S.-China trade deal and hopes for further stimulus in the world’s second-largest economy boosted sentiment.

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