Warning signs are flashing in China stock market post surge

Bloomberg

Investors are running out of reasons to chase the bull market in Chinese stocks.
After adding as much as $2.5 trillion to share values and outpacing gains everywhere else in the world, the rally in China is starting to look tired. Headwinds include an uninspiring earnings season, as well as the likelihood that Beijing will pursue a less aggressive stimulus policy than anticipated. Talks with the US on trade also resume this week.
Some of the hottest trades have already started to unravel in the past two weeks, including brokers, small caps and stocks with links to next-generation telecom networks. Analysts say there could be more pain ahead as the Shanghai Composite Index has failed to hold above a number of key support levels. Mainland trading will be shut for a three-day holiday from Wednesday.
“The correction might be far from over,” said Shen Bifan, chief strategist with Shenzhen Spruces Capital Management Co. “It would require strong earnings and economic fundamentals, or a shift in policy, to power further gains. None of those are immediately available.”
China’s official manufacturing gauge fell in April, data showed, adding to concerns over the country’s economic health. After its worst three-day decline since October, the Shanghai Composite Index closed up 0.5 percent on Tuesday.
As recently as March, Chinese equity traders were beating their global counterparts by the biggest margin since June 2015. The outperformance reversed only weeks later: the Shanghai index lost 5.6 percent in the five days through April 26, lagging the MSCI All-Country World Index by the most since January 2016. China’s momentum-driven stocks are losing steam. A gauge tracking the speed and magnitude of gains fell to the lowest since early January, or just when the rally was gathering pace. The 14-day relative-strength index hasn’t touched the 70 level since April 10, signalling the market is no longer overheated.
The Shanghai Composite has recently dipped below a few key levels that previously provided a floor for the gauge.
Overseas traders, who had been keen buyers of Chinese equities through the bull market, are taking profits. They sold a net $2.7 billion of A shares via stock links with Hong Kong this month, data compiled by Bloomberg showed. That makes April the biggest month of outflows since the Shenzhen link started in 2016.
Not everything is falling apart in this market. Investors are starting to buy into some of the nation’s biggest caps, which often outperform in a downturn because profits are stable and volatility is lower. The big-cap SSE 50 index jumped 1.6 percent, outperforming the CSI Smallcap 500 Index by the biggest margin since 2017.