Fomo, or fear of missing out, is a term usually trotted out towards the end of a bull market as more inexperienced investors rush in. Fomo can also be applied to a market showing signs of recovery after a prolonged downtrend.
This situation leads to a strong breakout rally, which is what we see in China.
A relatively quick reopening of China following a sharp relaxation of zero-Covid rules is a change that no global or Asia-focused investor can afford to miss. The Fomo feeding frenzy could ramp up swiftly, with the current rally leading to a longer-term stable uptrend.
Despite being locked behind a Covid-19 wall, the pace of change has not diminished. In many ways, the restrictions have increased the pace of change. China’s regulatory regime has become friendlier towards expanding domestic capital markets.
Until quite recently, onerous reviews and regulatory obligations were required for new listings. This led to a backlog of frustrations, and sometimes this stretched to thousands of firms and prevented private-equity investors from exiting investments.
A new system, trialled in the Shanghai Stock Exchange Science and Technology Innovation Board (Star) and ChiNext (a Nasdaq-style subsidiary of the Shenzhen Stock Exchange), is currently being rolled out to other exchanges. The new system is more in line with international standards and practice. It sets the requirements for listings but has dropped the often lengthy and arduous inspection requirements. Liquidity and stability on exchanges have also improved, and over the past five years, capital market reforms have encouraged the professionalisation of investment with greater participation from fund managers.
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It is claimed that volatile retail trading has been reduced, but this is not evident in market activity outside of the top 50 stocks. A Covid-19 liberated economy is poised for an acceleration in confidence that drives the Fomo strategy. Investors want to become involved in the return to economic primacy because it is a long way to the top from where the economy is now. Some are forecasting US$150 ($203) a tonne for iron ore, making Australian miners look attractive and a Fomo target.
Unlike previous recoveries, there is a new danger stemming from the concerted attempt by the US to suppress China’s progress. US and Chinese industrial policies are at odds with one another, suggesting that some form of decoupling is becoming more inevitable. The US Chips Act and the ‘Made in China’ ambitions are geopolitical shifts that could eventually oblige more and more companies — in the US, Europe, Japan, South Korea and elsewhere — to make some choice between the two blocs. It is this potential division that hampers all global economic recovery.
For some, there may be severe pressure to rethink business in China. As a result of sanctions and other politically motivated measures, some business leaders and investors may be forced to miss out on the world’s greatest gross domestic product growth engine. That gives a new twist to the meaning of Fomo.
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However, their absence from the China market opens increased opportunities for others to become involved. Careful selection of the domiciled location of China ETFs provides an easy entry point into a market poised to recover as economic growth is restored.
Technical outlook for the Shanghai market
The Shanghai index rapidly reached the first resistance target near the 3,220 we identified last week. This rapid rise is consistent with the fan pattern breakout behaviour. The 3,220 level is the lower edge of a resistance band. The upper edge of the band is near 3,280.
There is a high probability that the index will consolidate around this resistance level. The most bullish outcome is a further move towards 3,280, followed by consolidation within the resistance band.
The least bullish move is a retreat from the lower edge of the trading band near 3,220. Such a retreat is likely to be minor and in preparation for another resistance-level test.
The index chart has three features suggesting this breakout activity will continue and set a longer-term uptrend.
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The first feature is that the index activity is part of a double-bottom rebound. This is a long-term trend reversal pattern. This distance between the double bottom support level and the peak is measured and projected upwards. The first target for the pattern is the top of the previous pattern peak near 3,415. A move above the upper edge of the resistance band at 3,280 has a clear run to this 3,415 target.
The second feature is the way a fan pattern defines the rebound action. Confirmation of the double bottom breakout pattern comes from the developing fan pattern. The fan pattern is a unique pattern that signals a long-term trend change. The fan starts from a single point, shown as point one. It consists of a series of trend lines, shown as lines A, B, C and D. The fan pattern is often associated with long-term breakout patterns that develop over many months. This is a trend reversal pattern, and it does not involve setting price targets.
The third feature is how this breakout analysis is supported by the behaviour of the Guppy Multiple Moving Average (GMMA) indicator. The long-term GMMA has compressed and turned up, showing investors have become buyers and are supporting the emerging trend. The short-term group of averages are above the long-term group. Index values are clustered along the upper edge of the short-term group of averages. Traders are leading the breakout, but investors support them. This suggests a genuine trend change rather than just a short-lived rally.
Daryl Guppy is an international financial technical analysis expert and special consultant to Axicorp. He has provided weekly Shanghai Index analysis for mainland Chinese media for two decades. Guppy appears regularly on CNBC Asia and is known as “The Chart Man”. He is a national board member of the Australia China Business Council. The writer owns China stock and index ETFs
