In 1930 Shanghai was regarded as the Paris of the Orient. Rich and poor alike flocked to the city to participate in its beauty, excitement, and economic prosperity. These days millions are flocking to Shanghai but for very different reasons, the stock market. I've been watching the international markets for some time, and just a few days ago I noticed that the Shanghai Index was nearing a mythical 4,000 mark. Now, in general, I support markets moving upwards but this is getting frightening. A few quick facts to put the fear of China into you as well:
The Index closed just the other day at 3,950, shy by just 50 points of the 4,000 mark. The index is up 24% since the end of March. The index is up 48% since the beginning of the year. The index is up 240% in the last 2 years. More than 10 million new retail stock trading accounts have been opened this year . . . yes this year, we are less than 6 months in. The last time the market crossed an important milestone (3,000) the market stumbled 8% the very next day. Are you shaking your head and wondering how you can short this market yet?
I truly believe a robust market is nothing to fear, but I feel like this is getting out of hand. The feeling is so similar to the NASDAQ in 1999 & 2000, I started having flashbacks. Everyone and their mother had a trading account and a hot stock tip, and it seemed like everyone was making fortunes off moves in the market. A major concern crosses my mind with this emerging market. China is nowhere near as advanced in its methods and regulations surrounding the stock markets. Let me give you one simple example - investors in the US can easily bet against the market, or sell short. This simple act prevents markets from running to the upside and provides a counterbalance to trading. Yet this necessary constraint is not yet developed in the China markets. Stock index futures, the Wall Street Journal pointed out, are expected to be introduced in the next few weeks. They will initially be tightly regulated, but none the less, it will be a way for investors to bet against the continued trend upward in the market . . . and at some point they may become a self fulfilling prophesy. Apparently, I'm not the only person concerned about the markets. The Chinese market itself has started increasing minimum margin levels and limiting contract purchases for individuals. Hold on to your hats, a rollercoaster ride is not too far away.
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