Interesting chart of the Shanghai composite index over the last couple of years, courtesy of the good people of Yahoo! It’s worth remembering that, after being in the news last week for roller coasting up and down by as much as 8 percent (that’s the dip in the top righthand corner), the Shanghai index has resumed its steady (2 percent up today) rise. It’s testament to the fact that many people see a sharp drop as a buying opportunity rather than as a warning of more to come. Between retail Chinese punters and institutional foreign investors, this market has a ways to go but expect some more wild ups and downs in the meantime. My two cents worth are that this pattern will continue for some time to come, all other things being equal, that is to say a long climb, panic, sell, sell! sell!. Then, oops, maybe prices are reasonable again, recovery, euphoria, frenzy, then panic again, sell! etc etc The trick of course will be recognizing when things keep going down, a process that will be dramatically accelerated once it is in play by all those little guys cleaning out their bank savings to by Wan Fu Shanbei Mortified Widget & Co. Ltd.. They will hang on as long as they can but having no deep pockets to ride out storms, can be panicked into selling so when it comes, expect a very large drop indeed, possibly back down to the levels from which it started rising a little over a year and a half ago, which of course was a bottom reached after a long, long decline from its previous peak of 2000 and change in late 2001. Of course maybe this time it really is different, the laws of economics (gravity) have changed etc etc etc I think not.
But, what do I know, you might reasonably ask. I was saying the same thing about the U.S. market throughout the 90s. Of course, I was right eventually, but that’s not really the point. We’re all right (and dead as Keynes remarked) in the long run. It’s the here and now that counts.