The Shanghai Composite and Coronavirus: A Revealing Perspective

By: EWI

China's Shanghai Composite has been in a large-scale downtrend for about 13 years.

So, when the news of the coronavirus outbreak hit, it came as less of a shock to Elliott Wave International's global analysts.

You may ask, "What in the world does one have to do with the other?"

Our just-published February Global Market Perspective provides insight:

When a major infectious disease breaks out, we find that a stock market correction has usually preceded it. That observation is germane right now because China's Shanghai Composite has been tracing out a large-degree correction since its peak in 2007 and, not coincidentally, China has experienced numerous outbreaks of highly lethal infectious diseases over the 13-years-and-counting period.

One of the most lethal was the H7N9 bird flu epidemic that broke out in March 2013, which had a mortality rate of about 39%.

Here's another thing that's notable: The bird flu epidemic broke out a few months ahead of last decade's low in the Shanghai Composite, after which the index soared 180% over the next two years. The December 2019 novel coronavirus -- which Chinese researchers have since determined was present in the human population months earlier -- similarly broke out in the wake of another low, this time the 2019 low in the Shanghai Composite, as EWI's Asian-Pacific editor notes.

The takeaway is that many investors who view the coronavirus as bad news for Chinese stocks may be mistaken. In other words, negative news often reflects the past, not the future.

Indeed, Elliott Wave International's monthly Global Market Perspective showed this chart [Elliott wave labels available to subscribers] and said:

The coronavirus outbreak in China has dominated news headlines in recent weeks. But one story the popular press has failed to pick up on is that outbreaks of infectious disease go hand-in-hand with bear markets, as the chart [shows].

As early as 1994, The Elliott Wave Theorist observed that "disease sometimes plays a prominent role in major corrective periods." Not every stock market correction coincides with an outbreak of infectious disease; conversely, though, when a major infectious disease breaks out, we find that a stock market correction has usually preceded it. That observation is germane right now because China's Shanghai Composite has been tracing out a large-degree correction since its peak in 2007 and, not coincidentally, China has experienced numerous outbreaks of highly lethal infectious diseases over the 13-years-and-counting period.

The chart pattern of the Shanghai Composite is not the result of news -- i.e., the series of infectious diseases -- instead, Elliott waves often predict the news. In other words, the corrections occurred before each outbreak of infectious disease.

Elliott Wave International's research also reveals that other major events do not determine the trend of stock markets either -- even an occurrence as dramatic as war.

Yet, most financial experts hold the belief that external factors regulate the financial markets.

Get the eye-opening evidence which refutes that idea in a free 12-minute video titled "Learn What REALLY Moves the Markets."

Who is Elliott Wave International? EWI is the world's largest independent technical analysis firm. Founded by Robert Prechter in 1979, EWI helps investors and traders to catch market opportunities and avoid potential pitfalls before others even see them coming. Their unique perspective and high-quality analysis have been their calling card for nearly 40 years, featured in financial news outlets such as Fox Business, CNBC, Reuters, MarketWatch and Bloomberg

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