Turnover could signal peak for Shanghai stocks

Market strategist says investor 'euphoria' has driven valuations too high and warns that a tumble may loom, reports Bloomberg.

The surge in Chinese equity trading that coincided with market peaks in 2009 and 2010 is back again after the Shanghai Composite Index jumped to a three-year high.

The 30-day average daily value of shares changing hands on the Shanghai Stock Exchange exceeded 200 billion yuan ($32.6 billion) for the first time in four years on Tuesday, according to Bloomberg data.

Turnover last breached this level on Nov 9, 2010, the same day the SCI began its slide into a 38 percent bear market. The previous surge came on Aug 7, 2009, two days after the start of a 23 percent retreat.

"It's a good chance we're at a market top right now," said David Cui, China strategist at Bank of America Corp, on Wednesday. "Based on experience since the global financial crisis, surging volumes each time marked a temporary top for the market."

Jumps in trading may signal market peaks because they reflect too much investor "euphoria" toward stocks, according to Cui.

The SCI had climbed 23 percent this year through Wednesday, sending valuations to a 20-month high, as the city's exchange link with Hong Kong opened the market further to foreign investors and the central bank unexpectedly cut interest rates last week for the first time since 2012.

The rally left the SCI trading 33 percent above its last bear-market nadir on Dec 3, 2012. The gauge posted average bull-market gains of 41 percent since 2008, with bear-market retreats averaging 33 percent, according to Bloomberg data.

Trading on the Shanghai bourse is about twice as high as the five-year average and 29 percent more than turnover on the New York Stock Exchange. The value of shares changing hands on the Chinese exchange climbed to a record 338.7 billion yuan on Thursday as stocks advanced on signs of further monetary easing by the central bank.

The SCI rose 1 percent to 2,630.49 points on Thursday, the highest close since August 2011.

Chinese stocks have kept rallying since Cui said in July that they were poised to decline, and again after he reiterated that view in September. While he said shares may "do things defying fundamentals for a while", the strategist is sticking to his pessimistic stance because he said corporate debt levels are rising and China still has excess capacity in some industries.