China Stimulus Seems to Be Losing Grip on the Market

When it comes to stock indexes, CSI doesn’t stand for "Crime Scene Investigation."

Just the same, CSI 300 shorts would like to know if anyone got the license of the truck that just ran them over.

China’s so-called "bazooka" stimulus plan has lit up the CSI 300, an index operated by the China Securities Index Company, that approximates the performance of the 300 biggest stocks on the Shanghai and Shenzhen stock exchanges. 

The CSI 300 has gained an incredible 28% in just four sessions. 

Fun fact: Even after this incredible move, China’s CSI 300 Index has gained a total of just 5% over the past five years. Here are the CSI 300’s abysmal performance figures for the past three years:

2021: -1.23%

2022: -26.69%

2023: -11.12%

Looking at the CSI weekly chart, we can see that a three-year downtrend has just been broken (red dotted line). 

How long will the bazooka’s effects last? There are already signs that China’s stimulus plan might be losing its grip on the market.

Take a look at copper. Thanks to China’s stimulus plan, it’s not surprising that copper has rallied recently, gaining about 13% over the past few weeks.

Then, there was a vicious reversal in copper prices on Monday, complete with a bearish engulfing candle (circled). Copper reversed as it reached an area of prior resistance (green arrows).

Could this be a sign that the bazooka is already losing its power?

Why do we care about copper? China consumed 57% of the world’s copper in 2023, according to Statista.com. We can look to this industrial metal for clues about China’s health, as well as the health of the global economy.

If China’s bazooka succeeds, it’s good news for more than just China. The ensuing liquidity will slosh into all global markets, including U.S. stocks.

You could also include crypto in that equation. Bitcoin has enjoyed a run from $52,000 to $64,000 this month, for a gain of 23%. 

It’s interesting to me that, just as copper reversed direction, bitcoin did the same. Like copper, bitcoin hit resistance — this time in the form of a bearish trend line (green dotted line) — and reversed. 

The massive amount of liquidity injected by China is tremendously bullish. “Buy all the things” has been the battle cry for the past week, and buyers are being rewarded.

I’m not trying to spoil the party. While everyone else is dancing, I hate to be the guy in the corner at the party with a thought bubble that reads, “They don’t know that none of this is real.”

That’s the problem. It’s not real. China’s bazooka is nothing but smoke and mirrors. 

It’s a hell of a lot of smoke, and an amazing collection of mirrors, but in the end, that’s all it is.

With its decision to prop up the stock market using government funds, China has taken a literal joke — “plunge protection team” — and made it a reality. 

Despite the bazooka, there was no protection from Monday’s late-day plunge in U.S. stocks. Reality reared its head during a speech by Fed Chairman Powell, in which he cooled expectations for a 50 basis-point rate cut in November. 

Perhaps that reality check will remind us that while markets are bullish, the global economy is pretty scary already, and it's not even Halloween. 

At the time of publication, Ponsi had no positions in any securities mentioned.