Photo Credit: Telegraph UK
The exchange traded fund FXI was created to track the returns of China’s largest companies. Consider this ETF to be the version of the Dow Jones Industrial Average, which is made up of 30 of the largest stocks. Looking at the current price, it seems that China is cheap and only because of a slower US economy.
The bubble burst
After the bubble burst late last fall, the FXI exchange traded fund fell from $208 per share to $120 before staging a minor rally to $160 per share and only again to fall back to $120 per share. Today, the exchange traded fund is selling around the $130 level, which is a prime price for making a long term play. China has plenty of economic growth to sustain another movement to $208 per share. At this price, it wouldn’t be too far fetched to say China is dirt cheap.
Playing the bounce
Historically, the FXI has bounced each time it traded to $120 per share. First in January 2007, the ETF hit $120 for the first time only to drop to the low $90s. Another movement to the $120 line in June 2007 yielded a different result, causing a rally all the way to $208 before bursting in November. Last March after falling again to $120, the ETF rebounded to $140. This type of consistency is what traders should seek.
How to position yourself
The Chinese market was a bubble, but after falling nearly 50%, a case can be made that it's prime for the picking. Whether going short term or long term, Chinese bluechips look strong. At $128 per share, this ETF is perfectly priced for the long term. Short term investors might be more interested in waiting until the price further unwinds, although waiting for another touch to $120 might mean you sit out this time. The market has plenty of support where the gap occurred back in June 2007 from $122-$124, and the market doesn’t forget gapping. Either way, a long position looks solid.