China’s Market May Be Heading Lower (NYSE:FXI)

Unless you have been in a box the past year, you have seen China’s economy dominate.  iShares FTSE/Xinhua China 25 Index (ETF) (NYSE:FXI) has outpaced the SPDR Trust, Series 1 (NYSE:SPY) by over 20% for the past year.  Although there may be some sign of trouble for iShares FTSE/Xinhua China 25 Index.  It may the usual event, the economy does too well and now must undergo a correction.

The Inflection Point over at SeekingAlpha brings us 10 reasons they think China’s market is heading lower.  They are pretty compelling, so taking a short position or selling your long position might make some sense.  Some of the reasons include:

(The Inflection Point) - An aggressive rate-tightening cycle is forthcoming. Over the past two weeks, China’s central bank has been allowing market yields to edge higher while simultaneously raising the level of minimum bank reserves. Expect China to continue to move quickly as it tries to rein in excessive credit and, in particular, its real estate sector. This is very bad news for Chinese equities.

Inflation has re-emerged. Last week, economic numbers released by China’s government reflected higher-than-expected inflation. With China’s economy growing over 10% in Q4, odds suggest inflation may continue to quicken in the coming months. If so, expect China’s authorities to pick up their efforts at tightening credit. In such an environment, Chinese equity prices will be sure to see valuations contract.

China’s stock market seems ready to crack. Over the past few months , China’s stock market has been lagging, forging a series of lower highs and lower lows.  (Look at the 1-year chart prepared by The Inflection Point.)

After leading worldwide equities higher throughout 2009, important emerging markets such as China and Brazil failed to make fresh highs over the past few months. This divergence is a big negative and its importance cannot be overstated. This divergence strongly suggests select emerging markets will lead worldwide equities to the downside in the coming months.

Read more of The Inflection Point’s article here.  It contains some valuable descriptions of technical indicators and why FXI (and China’s overall market) may head lower in the near term.

Disclosure: No positions.