Chinese Stocks Are Looking Startlingly Similar To The 2000-Era Tech Bubble

Market corrections such as the one that U.S. equities have experienced in the past couple of trading days are certainly nothing new. However, analysts at Janney found a technical pattern that is eerily similar to one seen during the bursting of the Dot Com Bubble in 2000.

All Eyes On China

It’s no secret that China is the primary source of most of the global market fears this week. After the world’s second-largest economy recently devalued its currency, China followed up with some weak manufacturing data last week, adding to market instability and fears over China's future economic demand.

Double-Take

After a close look at the trading pattern of the Shanghai Composite Index, Janney analysts noticed a striking similarity to the trading pattern demonstrated by the Nasdaq during the bursting of the Dot Com Bubble in 2000. The similarity becomes obvious when the patterns of the two indices are overlaid in the chart below.

What To Expect Now

If the Shanghai Index continues to mirror the 2000 Nasdaq trading pattern, Chinese investors can expect about a 30 percent bounce from recent lows before the index turns south once again and ultimately establishes new lows at a level about 30 percent lower that recent lows all within a matter of months.

Should U.S. investors Be Worried?

While U.S. investors are right to be worried about China, the S&P 500 does not trade with nearly as much volatility at the Chinese markets. A look at the performance of the two indices during the past year shows the extreme difference in movement between the two indices.

Since June 10, the Shanghai composite has fallen 37.1 percent while the S&P 500 has declined by only 7.9 percent.