I’ve said this many times here in DailyWealth… I see huge gains ahead for Chinese stocks over the long run – sometime in the next five years.

Specifically, at some point in the next five years I expect Chinese A-shares – stocks that trade locally in mainland China – will soar more than 100% over an 18-month period.

However, over the short run, Chinese stocks are down roughly 20% from their February peak.

How should we deal with the long run versus the short run?

This question is incredibly important. So I want to address it specifically… by showing you that it is possible to handle moves like this in Chinese stocks.

I expect most people who invest in Chinese stocks will just sit tight. They will “buy and hold.”

That’s fine, if that’s what you choose. The long-term story for Chinese A-shares is great.

However, I want you to be fully aware of what you’re doing. You need to know one critical detail… that China A-shares go through incredible booms – and incredible busts.

Here are two examples of what I’m talking about:

  1. China’s large-cap CSI 300 Index soared from less than 1,000 points at the end of 2005 to around 5,800 less than two years later – for a gain of six times your money! THAT is the kind of move we want to be on board for in Chinese stocks.

But immediately after that huge gain, Chinese stocks crashed… They lost three quarters of their value in less than a year from peak to trough in 2008. Ouch! We want to avoid moves like that as much as possible.

2. In June 2014, Chinese stocks stood at 2,100 points. By June 2015, they were at 5,300 – more than        double in a year!

By June 2016 – again, one year later – they were back down to 3,000. That’s a roughly 40% fall in just a year. Again… Ouch!

I don’t want to miss out on that upside potential. But I DO want to avoid those busts.

I urge you to do the same.

You might not believe it’s possible to do both. So today, I want to show you an example of how this can work…

Let’s take a look at a simple idea: Own Chinese stocks when they are above the 40-week moving average, and don’t own them when they are below it.

If this sounds complicated, you just need to know that the moving average tracks an asset’s average closing prices over a given period. There’s nothing magical about it… It simply filters out the “noise” so you can see the overall trend.

It’s a dumb system. It’s not complicated. But it works…

Using a buy-and-hold strategy in the CSI 300 Index delivered a 12% return going back to 2005. However, the index rose at a 38% annualized rate when it was above the moving average… And it fell at a 13% annualized rate when it was below the moving average.

Take a look…

Just look at the outperformance when the index crosses above its moving average… and the underperformance when the index falls below it.

There’s nothing magical here about the 40-week moving average. It’s just the “industry standard” (like the 200-day moving average).

I’m not recommending this particular system, and I’m not using it. This system is simply a great example of two important things:

  1. It shows just how great the ups and downs are in China.
  2. It shows that you can stay on board in the good times and step aside in the bad times, with a simple system.

Again, this approach tends to deliver 38% annualized gains when in an uptrend… and 13% annualized losses when in a downtrend. And that’s just what a “dumb” system can do.

To me, the message is clear – in China, you want to be ON BOARD for the uptrends. And you want to be willing to step aside for the downtrends.

Right now, Chinese A-shares are in a downtrend. We have stopped out of our favorite China A-shares recommendation in my True Wealth newsletter. And we are close to our stop on the same recommendation in my True Wealth Opportunities: China service.

I’m OK with this. And I’ll be using several approaches to make sure we stay on board for China’s incredible booms… and step aside for the busts.

I strongly believe we will make big money in the next uptrend, once it arrives. Unfortunately, it’s not here today.

China A-shares will soar in the long run. In the short run, they’re in a downtrend.

I strongly believe you can avoid the bad times like now, and participate in the incredible boom times when they arrive… Today’s example proves it.

You just have to recognize that China booms, and China busts. We are not in a boom at the moment. So if you hit your stops, follow them.

We’ll get back in when the boom returns…

Good investing,

Steve

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Source: Daily Wealth