Mike Steinhardt from HEDGEfolios uploaded a great post today Comparing China’s Stock Market to the NASDAQ of the late 1990’s. As you know, I wrote about the technical comparison on Wednesday in my post titled Is Shanghai a Nasdaq Déjà vu

Please understand that we are offering opinions based on fundamental and/or technical data. With that said, you must realize that the market doesn’t care about our own personal opinions and will do what it wants, how it wants, when it wants. So, comment on what you think about what we are presenting (both technical and analytical).

I completely agree with Mike when he says:

“The dangers in comparative analysis are heightened when we only look at the similarities and then extrapolate a similar ending. Instead, we must look at the differences as well and when we do that, we still need to avoid the expectation that the ending will follow previous examples.”

And

“The chart overlay tells one part of the story. Of course, markets are much more complex than just looking at a chart. All the factors I mentioned and many others I have not discussed make the market. The chart is just a composite image of them and by only focusing on a picture we oversimplify everything else that is going on.”

That last sentence is the most important as I would expect readers of this blog to understand that we never try to predict anything and that technical tools are just a portion of your overall system. We as humans do tend to oversimplify markets when plotting them on a chart, forcing our eyes to see repeating patterns (that may not be there).

“I wouldn’t make a new entry into China’s stock market but then again, I have been saying that for over a year – a year in which the SSEC has gone up about 200%.”

I have taken part in the mania with individual stocks in the Chinese market in 2007 but I am becoming skeptical of the sustainability of the current rise. Is this due to my over-analysis of what may happen based on past events? Am I playing games with my own mind by trying to see something that is not there?

Maybe, maybe not! I took a position in my sixth Chinese stock (of 2007) this week and it’s showing a quick profit but I am skeptical as it was a pure spec play. I have a tight stop and I am not leaving much room for disaster in case things start to turn on a dime. As said on Tuesday, I was keeping my exposure low with a smaller than normal position (a very tight R factor).

Maybe the bubble will burst in China, maybe it will deflate slowly and then move even higher; whatever the case, I will take my individual signals while keeping an eye on the bigger picture. Thank you for the analysis Mike, I really appreciate your input.

“Will the chart of the decline mirror the pain we felt on the Nasdaq? I have no clue.”

Neither do I!