What History Says About the Sell-Off in China

What history says about the sell-off in China... A rare extreme in Chinese 'blue chips'... This chart says a bottom is near... Your last chance to get Sjug's favorite commodities recommendation absolutely free...

Regular Digest readers know our colleague Steve Sjuggerud has been incredibly bullish on China for the past couple years...

We've discussed his bullish thesis in detail many times, so we won't rehash it all here today.

In short, the country is benefiting from a confluence of four different trends – including a literal once-in-a-lifetime shift in the global investment markets – that Steve believes will push Chinese stocks hundreds of percent higher within the next several years.

And as we've noted several times in recent weeks, despite the recent correction in many of these stocks, Steve remains as bullish as ever today.

The reason is simple...

Nothing about the long-term story has changed. And as Steve has explained, even a full-blown trade war is unlikely to derail the bull market in these stocks.

Still, if the Digest mailbag is any indication, folks are getting worried. Many Chinese stocks have been drifting lower for weeks, and some readers are wondering if the bull market is over.

If you're among them, we have some good news...

The long-term fundamentals aren't the only reason to remain bullish today...

You see, the recent selloff in Chinese stocks hit a rare extreme. Big Chinese stocks in particular fell for eight straight days. This is unusual... and would normally be a bearish sign. Typically, we'd expect it to lead to further losses.

But history tells a different story here. As Steve and his senior analyst Brett Eversole explained in this week's True Wealth Systems Review of Market Extremes, published yesterday...

Longtime readers know how important it is to follow the trend. In fact, it's a major part of our True Wealth Systems strategy. But some rare extremes don't fit that pattern.

Normally a consecutive down-day extreme would point to a longer-term fall... But that's not the case with Chinese stocks.

After similar extremes, Chinese blue chips have gone on to outperform over the next year. We can see this fall through the iShares China Large-Cap Fund (FXI). Take a look...

In other words, history doesn't just say the recent selloff is no reason to worry...

It says it's actually an opportunity. More from Steve and Brett...

Since 2004, when FXI has fallen eight days or more in a row, the fund has gone on to outperform over the next year. Check out the returns...

Investors who bought after similar extremes could have made 6.5% gains in three months, 10% gains in six months, and impressive 13% gains over the next year... That's nearly double what FXI returned in a typical year.

To be clear, these specific returns were in large-cap Chinese stocks alone. But these stocks are highly correlated with the broad Chinese markets, which suggests other stocks are likely to move higher as well.

But this isn't the only sign of a bottom we're seeing today...

The following chart shows the weekly relative strength index ("RSI") of the benchmark Shanghai Stock Exchange Composite Index...

As regular readers may recall, the RSI is a momentum indicator, with values ranging from zero to 100. In general, measures near 30 or below indicate an asset is "oversold," and may be due for a rally. At the other extreme, measures of 70 or above indicate an asset is "overbought," and may be due for a correction.

As you can see, the weekly RSI for this index has fallen to near 30, indicating it's in oversold territory. In addition, you'll notice that the last two times it fell to this level – in 2013 and early 2016 – it marked a multiyear bottom in Chinese stocks.

In short, if you already own Chinese stocks, sit tight for now. If you don't, consider buying some today. History suggests a significant bottom is near.

Of course, regular readers know Steve is also bullish on commodities...

He believes a new bull market is already underway, and expects many individual commodities could soar 500% or more over the next few years.

If you're like most folks, you'd probably be thrilled with returns like that... But Steve says you can do even better.

You see, he says he has found the absolute best way to invest in commodities today.

It's a simple, "one click" investment that has dramatically outperformed traditional commodities investments. You can buy it in any brokerage account. And he'll be sharing all the details – including its name and ticker symbol – on the air during tonight's live event: the 2018 Commodity Investing Summit.

Again, tonight's event kicks off at 8 p.m. Eastern time. And it's absolutely free for all Stansberry Research subscribers. Click here to join us.