Stocks in China fell a second consecutive day as a government-engineered recovery proved fleeting and surprisingly strong growth data dimmed hopes for more economic stimulus.

The fleeting recovery of the China market, which had trillions wiped out of it in recent weeks, suggests investor confidence is far from returning in full. The continued slide reflects deepening doubts that Beijing can turn things around, despite heavy intervention in recent days.

A common opinion is that it would take a genuine miracle for Chinese stock prices to stay where they are. Many have rightly decided that it is time to take profits. However, the time to take profits was at the height of the market over a month ago. How can an investor get the timing right in such cases?

Market Timing

Buy and hold investors can time the market as well. The point of assessing the intrinsic value of a stock is to decide if it worth buying or selling. Market Watch tells how one buy and hold investor times the market.

Mechanical market timing, which I use for part of my own portfolio, is very different from the emotional in-and-out trading I just described.

Mechanical timing relies on rigid rules or “systems” designed to identify times when the market is more likely to go up than down, and times when it is more likely to go down than up.

This sounds like a form of prediction, but it isn’t. The systems I recommend are known as trend-following. That means they issue buy and sell signals that are based on actual market trends, both up and down.

When you design such a system, you want it to be able to ignore short, minor price trends that will turn out to be mere “noise” and yet react to price trends that, based on lots of history, have a relatively high probability of producing a profit or of avoiding major losses.

The old saying is that you do not have a profit until you have taken a profit. Although the Chinese stock market is down about thirty percent since its high there are many small stocks that have been virtually wiped out. If you are going to invest in a market whose rise is solely based on investor confidence there is always the risk of failure. Setting an amount that you want to gain out of a stock is a good idea. When, for example, the stock has gone up 30%, it could be time to take profits. And if it goes up another 30% what do you do? It depends on why the stock went up! In the case of the Chinese market where stocks rose as the economy was cooling off taking profits routinely would have been a good idea and when the market started to trend downward taking everything off the table would have been a better idea.

Time to take Profits PPT

An interest rate cut by China’s central bank on Saturday failed to stem the rout in Chinese share prices on Monday, and the Shanghai and Shenzhen stock markets closed with steep losses after their wildest swings in percentage terms in more than two decades.

The markets gyrated from initial gains of more than 3 percent, in response to the central bank’s action, to losses of more than 7 percent by early afternoon. The Shanghai market closed with a loss of 3.3 percent, while the especially volatile Shenzhen market plunged 6.1 percent.

The losses pushed both stock exchanges into bear markets, with stock prices declining more than 20 percent since their peak on June 12. Much of those losses have been in just the past two trading days, as indexes at both exchanges fell more than 7 percent on Friday.

Heavy losses among individual investors pose an economic and financial dilemma for the government and possibly a political challenge as well, if unhappy speculators start protesting that the government should do more to help the market.

Over decades of near-miraculous growth, Chinese investors have become accustomed to borrowing in order to invest. Trading margins are high. Then, when the market starts to fall, getting out of the Chinese bear market means taking substantial losses or risking a margin call.

Margin Calls in Chinese Markets

The South China Morning Post writes about margin calls and a panic sell-off in China.

Mainland shares suffered some of their biggest falls in years yesterday, as investors dumped stocks indiscriminately to meet margin calls.

The blue chip CSI300 Index fell 7.9 per cent to 4,336.19 – its biggest drop in seven years – and the Shanghai Composite index lost 7.4 per cent, or 334.14 points, to close at 4,192.87.

But the worst damage was in Shenzhen, where the city’s benchmark index fell 7.87 per cent, or 213.7 points, to 2,502.9, officially entering bear market territory after a fall of more than 20 per cent from a June 12 high.

In the past two weeks, 14 trillion yuan (HK$17.4 trillion) has been wiped off the value of mainland stocks – some 20 per cent of mainland market capitalization and three times the value of Apple, the company with the world’s biggest market cap.

If you got into Chinese stocks early and did not invest or trade on margin is getting out of the Chinese bear market an issue? After all the old blood in the streets investing scenario suggests that the time to invest is often when things look their worst.

Stock Prices Not Related to the Real Chinese Economy

A writer in Forbes begs to differ regarding the real strength of the Chinese economy versus Chinese stock prices.

With the Shanghai index down nearly 20 percent from vertiginous heights reached in mid-May, a lot of people are wondering what next – and not a few are suggesting the Chinese economy is headed off a cliff. Pat Choate begs to differ. “The connection between Chinese stocks and the real economy is zero,” he pronounces. “Chinese corporations do not need high stock prices to keep expanding. They are government-owned entities financed by a government-owned banking sector.”

So, maybe now is not the time to worry about getting out of the Chinese bear market but rather adding a little to your investments.

Getting Out of the Chinese Bear Market PPT

Hong Kong’s bull kept raging on Monday, with the benchmark Hang Seng Index jumping nearly 3 percent to fresh seven-year highs on expectations more money will pour in to hunt for bargains.

Brokerage BOC International forecast that about 100 billion yuan ($16.09 billion) will be raised by mainland fund managers and become available for Hong Kong investment as early as May.

China recently allowed mutual funds to buy Hong Kong stocks under the Shanghai-Hong Kong Stock Connect scheme.

On Monday, investors are also encouraged by a report in Hong Kong’s Oriental Daily that speculated that the daily quota for Hong Kong stock purchases by mainlanders under the Connect scheme will be nearly quadrupled to 40 billion yuan.

Is it time to invest in the Hong Kong stock market? The hype in Hong Kong is that Chinese investors will find cheap valuation and more in Hong Kong. Another reason for mainland investors to want to invest in the Hong Kong stock market are plunging real estate prices and dwindling exports. Simply put there may be better ways to make money than investing directly in mainland China these days.

Is This the End of the Chinese Economic Miracle?

Over the last forty years China has mimicked the economic experience of the United States in the latter half of the 19th century. China routinely experienced ten percent economic growth or better. Now economists expect China to be happy with seven percent growth this year and perhaps five percent growth by the end of the decade. The Wall Street Journal weighs in on weak first quarter growth in China.

According to data released Monday by the General Administration of Customs, Chinese exports fell 15% and imports fell 12.7% last month in dollar terms as weak domestic and foreign demand weighed heavily on Chinese factories.

Beijing faces growing pressure to pare interest rates, cut bank reserves and increase government spending following a string of weak property, industrial production and other economic data in recent weeks, said Mizuho economist Shen Jianguang. He said he expected first-quarter growth to be around 6.8% or 6.9%. “But the real fundamentals, industrial production, could be even weaker,” Mr. Shen added.

The point is that there may be better places to invest right now than in mainland China. To invest in the Hong Kong market will give investors another more viable option.

What Are the Problems in China?

The Australian looks at the Chinese economy from the viewpoint of how Australia will need to look offshore as demand for raw material exports to China diminishes.

China’s 2014 GDP growth rate of 7.4 per cent was the lowest since 1990, and is forecast to drop to about 7 per cent. The long-term factors behind slower growth for China include:

China’s ageing population and a shrinking workforce.

Rising real wages, as regional and sectorial labor shortages enhance labor bargaining power.

Over-capacity in many Chinese industries, as a long-term consequence of policies that have favored investment ahead of consumption.

Visible pollution of air, water, soil, food: resistance from consumers and residents increases, and pollution control will mean higher costs for many companies.

As a first step many Chinese may choose to invest in the Hong Kong stock market. Other investors may wish to look totally outside China for investment opportunities.

Invest in the Hong Kong Stock Market PPT