Photo: Business Insider
Bond god Jeff Gundlach will be hosting one of his popular webcasts this afternoon. On the call, Gundlach will certainly address his favourite chart: the Shanghai Composite index.He regularly argues that the index is worth watching because it tends to be a leading indicator of the U.S. stock market.
However, Citi’s Tobias Levkovich thinks it’s a mistake to think this way.
“Investors misperceive the Shanghai market as always having been a key lead indicator for US stocks,” writes Levkovich.
Correlation was high around the US credit crisis but appears to be reverting back to “normal.” The Chinese markets had been a three-month lead indicator for US stocks around the 2007-09 financial crisis, a relationship that we utilized in the past, but it seems to have gone back to its historical norms of much of the 2000s when the two stock markets were being driven by their own unique drivers in the form of monetary policy, earnings and economic growth. The global growth intersect during the banking sector woes in the US was very significant given the large impact of US demand for most exporting nations, but the reverse is not as crucial with near 70% of S&P 500 revenues being generated domestically while Chinese demand represents less than 2%.
Here’s a chart that shows the brief 2007-09 link. “[T]hat relationship was more the anomaly than the norm if one looks back over the past 12 years.”
Photo: Citi Investment Research & Analysis
Gundlach recently told Business Insider that the recent breakdown in the linkage is unlikely to persist.
Thus short SPX long SHCOMP could be an interesting speculation. Probably a better trade today than the short SPX/long IBEX trade that has worked well since I recommended it at Ira Sohn (up 8.3% on the pair trade).
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