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China stocks fell in Asia to the lowest in 2010

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forecast_down Jan. 29, 2010 (Chinavestor) Shares of Chinese companies continued to slide in Asia on Friday. The Hang Seng Index fell -234.38 points or -1.15%, erasing most of the gains from Thursday, to 20,121.99 at the close. Among HKEx-NYSE cross-listed blue chips only  two advanced while the rest fell. China Life Insurance (HKG:2628) (NYSE:LFC) closed +1.5% higher while  Huaneng Power (HKG:0902) (NYSE:HNP) advanced +0.5%. But energy and metal plays declined as commodity prices softened. CNOOC Ltd. (HGK:0883) (NYSE:CEO) fell -3.8% followed by Yanzhou Coal (HKG:1171) (NYSE:YZC) and Aluminum Corp. of China (HKG:2600) (NYSE:ACH).

Trading in Shanghai Composite Index rose above the psychologically important 3,000 level for most of the trading day but a steady erosion in the second half of the trading day sent the index -4.86 points or -0.16% lower to 2,989.29 at the close. Financial institutions, real estate developers continued to show weakness. Bank of Communications (SHA:601328) fell -10.3% for the week making it the worst performer among the largest 50 companies listed in Shanghai. China Vanke (SHE:200002), the largest listed Chinese real estate developer, tumbled -9.52% for the week. Saic Motor (SHA:600104), the largest Chinese auto maker and a GM partner, fell -2.3% on Friday.

Looking ahead the picture is rosy. For one, index futures point to a higher open thanks to the strong GDP report. And for two, equity markets became way oversold and are ready for a sizable correction. Looking at the technical condition of the Chinese ADR universe, readings are near record lows. The large number of Chinese stocks trading below their 20-DMA and 50-DMA suggests a sharp correction is inevitable to the upside, only a catalyst was needed. The relative strength index for Chinese ADRs is very low at 0.24, a very bullish short term indicator.

pre-2010129

As the following index and ETF indicator suggests, U.S. equity markets have became oversold and ready for a sharp correction. The China Small  Cap ETF (NYSE:HAO) is the best positioned to rally on Friday among Chinese ETFs because this ETF fell the most and is the most oversold at the moment. As a result, expect small cap Chinese stocks to outperform large cap on Friday.

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