More About the China Correction -
Talking Heads Shoot the Dog

Dave Skarica
Mar 1, 2007

You know it is bad when a brain dead talking head decides to drag the dog outside and shoot it, which they did on Tuesday. On Tuesday, February 27th, the Dow fell over 400 points on the heel of a 8% + decline in the Shanghai Index.

There were numerous reasons for the large drop in China, some of it was due to former Fed head Alan Greenspan who stated he thought the U.S. economy would go into recession next year. Of course that opinion and 8 dollars will buy him a cup of coffee in Tokyo.

Most of all it the decline was just overdue. We had not seen a 2%+ one day decline in the Dow since March 2003, the longest span ever without one!

With his irrational exuberance speech coming in 1996 when the Dow was 6000 and NASDAQ just over 1000 we all know Greenspan's track record as a stock market guru.

On January 13th, 1973 he stated, "it is hard to be as unequivocally bullish as now." That was days before the market entered the worst bear market since the 1929 crash. We all make bad predictions; so remember Greenspan is not infallible.

It is true that the Shanghai Index has seen a huge run in the past year and a half. On Monday it was up over 130% since December 31st, 2005. However, there is an interesting note on this that we do NOT SEE any other commentator discussing this side note being despite huge economic growth from 2001 to 2005 the Chinese market actually went down, and went down by a large amount. After peaking at a level of 2200 in 2001, the Shanghai Index declined all the way to 1000 in 2005, before rallying to 3000 earlier this week. If you look at all the growth in the Chinese markets and economy in the past 6 years, 2200 to 3000 on the Shanghai Index isn't a big deal.

Of course things are a little different in China, the Stock Market does not have the huge impact on the economy that it has in the United States and with all but extremely high net worth foreigners barred from trading the market (you must have 10 billion in assets to invest making it impossible unless you are a large financial institution or Bill Gates); the market is rather thinly traded.

What we find intriguing is all the analysts coming out of the woodwork telling us that the investing in high-risk assets is now over. Where were they last week?

What everyone is forgetting is that all-important friend when following the market. This being history. In my first book Stock Market Panic, I found an interesting pattern in stock market crashes. In both the 1929 stock market crash and 1987 stock market crash the crash occurred 55 days after the market peaked!

What usually happens is there is a slow correction followed by a small "buy on the dip rally", total complacency reigns then the market falls out of bed. It is very rare for markets to begin corrections with huge 4-5% one day declines. Usually when a large one-day correction occurs, it is part of a short, small decline not the start of something larger. We could be wrong on this one, but this feels more like a correction, rather than something larger and longer. Remember, we wrote a book predicting a bear market, so we ain't cheerleaders' we are just stating the historical facts and the fact of the matter is bear markets usually begin with a whimper not a bang.

We could see a 10% correction as we have gone through the second longest period in U.S. history without one. But, we really don't know if it will be much more than that.

It should also be noted that the 10-year bond is on the verge of breaking out in price and breaking down in yield. The yield is down to 4.51% and it is looking increasingly likely that the Fed will cut rates sometime in the second quarter.

Gold took an over 20-dollar hit on news of the Chinese sell off. We heard a talking head say it was because of reduced demand for commodities. Now of course if a big bad bear market started, yes-gold stocks could get slammed, as they are equities. But if the Chinese market were to fall faster than a 100 pound weight from a 300 story building there would a HUGE flocking to gold which would send prices much higher.

The basic conclusion, is until we see more signs of confirmation, this is nothing more than a short term sell off where everyone decided to sell everything. Note that almost every stock on our list has a stop/loss and please follow them. The fact of the matter is we do not want to give back everything we have made in this current gold bull market.

Sincerely,

Feb 28, 2007
Dave Skarica
email: freemarketdave@yahoo.com
website: www.addictedtoprofits.net

Dave Skarica is the editor of www.addictedtoprofits.net, which specialiazes in technical analysis and resource trading.

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