What happens when the stocks become overpriced? A correction takes place. The size of the correction depends on how much the stocks are overpriced. Chinese stocks have seen massive rallies this year and analysts are now saying that the Shanghai Stock Market may be overpriced now.
Based on the widely used forward price-to-earnings metric, the Shanghai composite index appears to be the most richly valued major market on Earth.
The index is now trading at a forward P/E of 24.2, according to S&P Capital IQ….Incredibly, Shanghai valuations have nearly tripled over the past year, as the Chinese market has been liberalized and the Chinese government has loudly encouraged investment….That is to say, the year-long, 130-plus-percent rally in the Shanghai composite has been driven not by profit growth, but by multiple expansion. And that has some investors worried.
What this means is that Chinese stocks are rising quickly and as a consequence falling quickly as well. So if you are interested in trading Chinese stocks, the best strategy for you is to trade options. Options though somewhat expensive lower the downside risk.