U.S. stocks at new highs while Chinese stocks plumb new lows: that's not necessarily a sign of coming doom.
To the contrary, according to Jeffrey Gundlach, founder of Doubleline Capital and the former head of the $12 billion TCW Total Return Bond Fund, it may be a reason to think about a pairs trade that involves going long Chinese stocks and shorting the S&P 500.
In an response to Business Insider, Gundlach said the S&P 500 continues to rally from the depths of global gloom about the European debt crisis in May. The Shanghai Composite is down on fears of slowing growth and higher food and energy prices.
How long can this go on? Probably not much longer, he tells BI -- which is why he suggests the pairs trade.
One twist on that idea, though, comes from Michael Arold, manager of the Techncial Swing investment model. Like Gundlach, he thinks the Shanghai's underperformance is a reason to check out Chinese stocks.
Shorting the S&P might not be the way to go, though, based on Arold's research.
There have been four multi-month periods since 1995 where Chinese stocks declined while U.S. stocks rallied, Arold notes. Each time, Chinese stocks eventually joined the U.S. stocks in their upward path.
Not once in 20 years did a decline in Chinese stocks lead the U.S. stock market lower. Read more about it and see Arold's chart here.
Photo by: Cliff Kule