What rebound? China’s huge number of oversold stocks signals equity market woes aren’t over
Although 54pc of Shanghai benchmark index stocks are oversold, analysts say that’s no indication of the market bottoming out
China stock benchmark’s breach of a key support level bodes ill for mainland equities, if historical data on the number of stocks seen as oversold by technical traders is any guide.
Escalating trade tension between China and the US sent the Shanghai Composite Index down by 3.8 per cent in Tuesday’s trading and put the gauge to close below the 3,000-point gateway for the first time since September 2016. While 54 per cent of the stocks on the 1,464-member benchmark have already dipped below the indicative oversold line, such breadth is insufficient to signal that the market is close to bottoming out soon.
Technical traders typically use the 14-day relative strength index to weigh the momentum of stocks. A reading above 70 indicates stocks are overbought and one below 30 signals being oversold.
Historical data that showed the battered stocks needed to make up at least 70 per cent on the Shanghai Composite before the gauge could even begin to reverse a downward spiral. During the 2015 market crash, 78 per cent of the stocks saw their relative strength index breached 30, and the proportion reached 70 per cent in the 2008 global financial crisis, according to Bloomberg data.
“The market hasn’t capitulated and it has yet to find a bottom,” said Wu Kan, a fund manager at Shanshan Finance in Shanghai. “Fundamentally speaking, we need to see the easing of the trade war and deleveraging, the two main factors that have weighed on the market, before we can talk about the bottoming out.”
