"The parabolic rise that we've seen in China is making me nervous," says Mike Burnick in Global Market Investor, www.globalmarketinvestor.com. "But I'm not ready to bail out yet, as I see more upside ahead."
"The U.S. listed FTSE/Xinhua China 25 Index ETF (NYSE: FXI) has surged more than 75% higher since I issued a buy recommendation in May. So the obvious question I get is: how much further can it go?
"Of course, it's not so easy to answer that question. Clearly, the mainland China markets in Shanghai and Shenzhen are forming an historic bubble.
"These domestic Chinese indexes are attracting lots of speculative cash from retail investors, which has driven Shanghai up nearly 400% in value just since the end of 2005 - that's a bubble in the making if I ever saw one.
"But remember, FXI doesn't hold the overvalued mainland China shares. Instead, FXI holds a mix of U.S. listed ADRs, and Hong Kong listed H-shares - which are much more reasonably valued.
The Hong Kong listed H-share index is trading at just 22 times earnings, compared to a Price-earnings ratio of about 55 for Shanghai - it's much more reasonably valued even after the big gains.
"Now clearly if Shanghai shares suffer a major bear market, Hong Kong H-shares would likely correct in sympathy, but I don't see any serious indicators that tell me this is about to happen, not yet anyway. Mainland China is booming and so is Hong Kong, and in fact all of Southeast Asia as a result.
"If you're wondering about placing a stop on this ETF, I'd note that I have thought about that a lot recently. But the volatility makes it difficult to place stops without getting whipsawed out on the slightest correction.
"For instance, FXI dropped sharply in August, but if you sold then, you missed out on an upside move of more than 30% since September. So for the moment I'm staying 'nervously' bullish."
Source: Steven Halpern, TheStockAdvisors.com, www.TheStockAdvisors.com quoting from Mike Burnick, editor, Global Market Investor, www.globalmarketinvestor.com
