“Decoupling” originally referred to a concept whereby emerging / developing markets could move independently of developed markets like the U.S. However, this independence of movement has never quite materialized.
Granted, emerging regions have experienced super-sized gains; yet, the directionality of all stock assets has remained exceptionally high.
Then in later November, around the time of Dubai’s debt troubles, something strange transpired. The iShares China 25 Fund (FXI) began to “decouple” from other stock market investments.
Notice, for instance, that FXI has been in a near-term downtrend since mid-November. In fact, for nearly the last 2 months, FXI has been on a course of hitting lower lows. (And that’s never a good sign!) The iShares China 25 Fund (FXI) will likely need to show an ability to stay above a price of $41.28 to break the pattern.
In complete contrast, both Claymore China Small Cap (HAO) and PowerShares Golden Dragon Halter China (PGJ) have been hitting higher highs. Also, both remain in an uptrend.
Regardless of performance differences, one might expect all China stock assets to correlate at a very high rate. In fact, over 1 year, FXI, PGJ and HAO demonstrated a near perfect relationship with a correlation coefficient of .99. Over the last 6 months? The iShares China 25 Fund (FXI) has a correlation coefficient with PGJ and HAO of .77. That’s strong, but fading… particularly since November.
From a macro-econ perspective, we know what’s ailing China. The government is looking to curb rampant speculation in its property markets. Google (GOOG) is vowing to leave over Chinese censorship. China’s economy is white hot. And the worldwide demand for energy / materials is hugely dependent on the continued interest of the Chinese.
Yet the country is still modernizing, still producing, still hitting it out of the park like Mark McGwire (steroids notwithstanding). Investors will continue to look to the Far East.
That said, investors concerned about ETF risk, might have a stop-loss sell order on FXI at $41. This is a price that is 11% lower than the mid-November high of $46.1 as well as a price that is nearly a percentage point lower than the most recent low established in December.
Similarly, one would want to track the progress of HAO and PGJ. If the decoupling from FXI continues to be favorable, you’d allocate accordingly. If the “other” China ETFs break down the way that FXI has been breaking down, you might side-step China risk for a period.
Disclosure Statement: Gary Gordon, MS, CFP is the president of Pacific Park Financial, Inc., a Registered Investment Adviser with the SEC. The company and/or its clients may hold positions in the ETFs, mutual funds and/or index funds mentioned above. The company does not receive compensation from any of the fund providers covered in this feature. Moreover, the commentary does not constitute individualized investment advice. The opinions offered herein are not personalized recommendations to buy, sell or hold securities.
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