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Correction looms for China Life

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decline2We published an article about China Life Insurance (LFC) on Thursday predicting a weak market showing for the upcoming days. We maintain our short term outlook, especially that the stock traded water on Friday. Remember, China Life Insurance jumped $3.51 or 6.34% on Thursday making it the fifth largest jump in percentage terms for 2009. The reasons for such a strong performance are two fold. For one, China Life derives over 10% of its profit from investment gains related to the performance of the Shanghai Composite Index. China Life got significant allocation of mega IPOs in Shanghai, including a significant portion of Petrochina (PTR) and Industrial and CIndustrial & Commercial Bank of China (601398.SSQuote)(1398.HKQuote). Remember, PetroChina (0857.HKQuote)(PTRQuote)(601857.SSQuote) hit $1 trillion in market cap for a short period of time, the benchmark no other company hit ever.

Also, ICBC is the largest lender in China and among top three banks in the world measured by market capitalization. These two companies are index heavy weight so when the Shanghai Composite Index <.SSEC> passed 3,000 a week ago, these companies were obviously behind the strong performance. Having said that, analysts expect China Life to record better than expected investment returns for 2009 H1 sometime between August 24-26.

 

Best Stock Days for China Life in 2009 so far

LFC_big_day

The other reason for a strong performance comes from increased institutional interest and upgrades. Credit Suisse upgraded China Life in Hong Kong on Monday July 6 citing "improved outlook for 2009 first half". The same day LFC jumped $2.08 or 3.79% in New York.

But as our analysis reveals, strong performance is usually followed by a hangover or loss of momentum. According to the following calculations taking into account the most recent five big jumps, China Life gives back $0.95 or 1.88% on average the day following big jumps.

Days following big market days for China Life in 2009

LFC_next_day

In addition to this, we run the Overbought/Oversold calculator for a variety of China stocks and it is visually striking to see how big China Life (601628.SSQuote) (LFCQuote) (2628.HKQuote) jumped just in the last day. Given the size and the position of the arrow - an indication of the stocks price move during the last five trading days compared to the rest of the China stock universe - it is obvious that LFC moved significantly and the stock price is trading above normal trading range despite wide range stock losses elsewhere. This indicates LFC will have to take a break.

obos-713

OBOS-exp

Overbought A technical condition that occurs when prices are considered too high and susceptible to a decline. Overbought conditions can be classified by analyzing the chart pattern or with indicators such as the one above. A sharp advance from $15 to $30 in 2 weeks might lead a technician to believe that a security is overbought. Or, a security is sometimes considered overbought when the stock is trading out of its trading envelope and is approaching the theoretical high. It is important to keep in mind that overbought is not necessarily the same as being bearish. It merely infers that the stock has risen too far too fast and might be due for a pullback.

Oversold A technical condition that occurs when prices are considered too low and ripe for a rally. Oversold conditions can be classified by analyzing the chart pattern or with indicators such as the one above. A sharp decline from $30 to $15 in 2 weeks might lead a technician to believe that a security is oversold. Or, a security is sometimes considered oversold when the stock is trading below its trading envelope and is approaching theoretical lows. It is important to keep in mind that oversold is not necessarily the same as being bullish. It merely infers that the security has fallen too far too fast and may be due for a reaction rally.



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