(Feb 14): Current attention is focussed on the newly named Covid-19 coronavirus. Coverage ranges from the realistic to the hyperbolic so it is easy for investors to lose track of the underlying and long-lasting impacts. Now is the time to consider portfolio rebalancing and that does not mean chasing high-flying biomedical stocks. Rebalancing means adjusting exposure to long-term assets that will continue to be impacted by this virus outbreak. The gaming rooms at Marina Bay Sands are at immediate risk, but the legal and semi-legal online gaming portals will take up the slack – perhaps on a more permanent basis.
Exposure to airports and airport services calls for a reduction by cashing out and waiting for a recovery entry point in a few months’ time. Banning flights to and from China has been an easy step but the potential to ban cargo ships from travelling to and from China is a much more difficult process. If Japan refuses to allow cruise ships to dock because they have coronavirus cases on board among passengers and crew, then what happens when a container ship arrives with infected crew members?
This is a dilemma waiting to happen. The impact on PSA (formerly Port of Singapore Authority) traffic, on shipping and logistics companies will be substantial because vessels can be effectively taken out of the logistics chain and, like plague-ships of old, denied docking access.
We certainly do not want to paint a cataclysmic picture. However, we cannot ignore both the short- and longerterm impact of the coronavirus, containment on logistical operations. For investors, it may again be a matter of taking profits before the fall and then using the cash to buy back into these assets as a recovery begins.
Lurking in the background are other threats to investment which have been obscured by the coronavirus outbreak. First among these is the shut-down of the World Trade Organization (WTO) appellate system after the US vetoed new appointments. There is now no functioning independent appeal system for international trade.
The US was a long-time supporter of a rules-based system and had used their support to lambast China for supposedly ignoring that system. The US has now discarded this in favour of a power-based system where the strong do what they wish and the weaker are just collateral damage.
The second investment threat is seen in the extension of this new US policy approach with the US-China Phase One trade deal. This deal is a leading example of the replacement of a trading system based largely on agreed WTO rules with one based purely on negotiating muscle. The deal is full of measures that favour the US but disadvantage other countries. The coronavirus outbreak has obscured the strong analysis of the deal.
Replacing rules with the power of a capricious bully places mid-sized and smaller economies at the absolute mercy of the powerful. These countries have lost the protective umbrella of the WTO rules and are now open to the unilateral renegotiation of bilateral treaties.
Some countries joined the fashionable chorus claiming that China has taken advantage of WTO rules, but this is often a matter of those living in glass houses throwing stones. It is the mid-sized and smaller economies like Australia and Singapore which have most comprehensively benefited from the WTO global order.
China has committed to purchase an additional US$200 billion ($277 billion) in imports from the US over the next two years. To achieve these targets China must reorientate its economy. This means buying soybeans from the US rather than Brazil and buying American beef instead of Australian beef.
The coronavirus outbreak will pass and there are short-term measures that can be taken to protect and grow investment portfolios. The other two threats are long term and persistent and cannot be ignored.
Technical outlook for the Shanghai market
The strong rebound rally in the Shanghai Index has continued, with each day making new highs. The rally moved easily and quickly above the resistance level at line A near 2,850. This is a potential support level for any market retreat. The next strong resistance level is line B near 2,980.
The 2,980 level marks the start of the monster gap fall that developed when trading resumed after Lunar New Year. Monster gap falls are followed by recoveries, but they usually take several months. One of the key features of the recovery is the way the close on the day immediately prior to the monster gap acts as a strong resistance feature. If we apply this monster gap behaviour to the Shanghai Index, then the analysis suggests the rally will encounter resistance near 2,980. Traders who followed the rally over the previous weeks will use this consolidation as an opportunity to lock in profits.
A consolidation around 2,980 is bullish not just because it is a great rebound from the monster gap lows, but because it signals a return to the behaviour that dominated the market in the second half of 2019. This was trading band behaviour where the market oscillated around the 2,980 level in a broad trading band.
Repeated oscillation round the 2,980 level has the first resistance level near 3,040 and an historical support level near 2,900. This is not a well-defined support level, so it acts more as a region than as a reliable calculation level. The current rally behaviour is defined by a very steep trend line. This trend line is only a short-term feature. A valid and reliable trend line needs three anchor points. These are created by a notable pullback and rebound rally. This creates an anchor point that shows how far the index can retreat within the uptrend before the uptrend resumes. The second and third anchor points have not yet developed so this fast rise is defined as a rally rather than a trend.
The recovery behaviour shows a steady vote of confidence in the Chinese economy, its ability to withstand this economic disruption and its ability to resume economic growth.
Remember, when analysing these market conditions, we cannot apply any indicator which is based on a calculation of averages. This includes RSI, Stochastic, MACD and GMMA. The large gap down creates a total disruption to the calculation of these averages and traders must wait for this impact to wash-out of the indicator calculation.
Analysis relies on trend lines and proven support and resistance levels. Basic chart analysis captures trend and momentum behaviour and the way it is constrained by support and resistance features.
Daryl Guppy is an international financial technical analysis expert and special consultant to Axicorp. He has provided weekly Shanghai Index analysis for mainland Chinese media for more than a decade. Guppy appears regularly on CNBC Asia and is known as "The Chart Man". He is a national board member of the Australia China Business Council.
