Right now, most investors are focusing on the situation in Greece, fighting in Ukraine and the specter of possible interest rate hikes from the Federal Reserve. But Chinese stocks also demand attention.
Since last summer, the Shanghai Stock Exchange Composite Index has been melting higher, rising more than 60% into a triple-top pattern in January. The motivation was anticipation that amid an ongoing economic slowdown that threatens the country’s dangerous credit overhang and overinvestment in real estate and factories, Beijing would acquiesce by cutting interest rates and unleashing stimulus.
In November, the People’s Bank of China, the country’s central bank, kicked things off by cutting its policy rate for the first time in more than two years. On Thursday, the PBoC cut its Bank Reserve Ratio by 0.5% to 19.5% — reducing the amount of capital reserves Chinese banks must hold — in the first broad rate cut since May 2012.
Yet Chinese stocks crashed through their 50-day moving average in a way that hasn’t been seen since last June, putting the recent uptrend at risk of reversal.
China’s overinvestment/bad debt problem is deep, intractable and won’t be easily fixed. For scale, since the recession the Chinese banking system has grown by a magnitude that took the United States 100 years to accomplish. It’s simply too much, too fast. Moreover, authorities have been shooting down the thinking that more cheap-money stimulus is coming.
In response, I’m seeing exciting new opportunities on the short side for Chinese stocks. Here are three worth looking at.
3 Ways to Short Chinese Stocks: Alibaba Group Holding Ltd (NYSE:BABA)
Click to Enlarge The Chinese internet giant Alibaba Group Holding Ltd (NYSE:BABA), which had its IPO to great fanfare back in September, has been sliding lower since November and accelerated to the downside late January amid weak earnings and a crackdown on its sales of counterfeit goods.
Now trading at under $87, I wouldn’t be surprised by a violation of the post-IPO low of $82.81.
I recommended the BABA Feb $90 puts to by Edge Pro subscribers back on Feb. 4, and trimmed the position for a 118% gain just one day later. The position is now up more than 150%, but looks ready for more.
3 Ways to Short Chinese Stocks: Baidu Inc (ADR) (NASDAQ:BIDU)
Click to Enlarge Chinese search engine Baidu Inc (ADR) (NASDAQ:BIDU) has wilted to test its 200-day moving average for the first time since last May — putting at risk an uptrend going all the way back to the summer of 2013.
The Feb $210 puts look attractive and are set to triple on a decline to the October lows.
After growing by 33% in the last year, BIDU stock is down nearly 4% so far this year, making it one of the Chinese stocks to short.
3 Ways to Short Chinese Stocks: ProShares UltraShort Emerging Markets ETF (NYSEARCA:EEV)
Click to Enlarge China, due to its size, is the largest holding of most indices of emerging market stocks. The ProShares UltraShort Emerging Markets ETF (NYSEARCA:EEV), which is a leveraged inverse fund, carries a 19% exposure to Chinese stocks.
As quick and easy way get exposure to China’s nascent stock market pullback — as well as the negative influence weakness in Chinese stocks will have on emerging market shares in general — the EEV fits the bill.
The ETF has more than $41 million in total assets and carries an expense ratio of 0.95%.
I’ve already recommended a position in the EEV to my Edge subscribers.
Anthony Mirhaydari is founder of the Edge and Edge Pro investment advisory newsletters.
More From InvestorPlace
- Airline Stocks to Book or Bump
- Bearish Change of Trend May Be at Hand
- Krispy Kreme’s Glaze Is Starting to Melt
