If it’s true that all things that start well end well, you want to buy Alibaba Group Holding Ltd (NYSE:BABA). Typically, investors shy away from publicly traded companies that have enjoyed an unprecedented run in the markets. But on the first day of trading for 2018, Alibaba stock closed up 6.5%, allaying fears of a disappointing performance.
Why did BABA stock respond so strongly to start the new year?
Positive Chinese economic data that came in above expectations significantly boosted sentiment towards Alibaba, as well as other Chinese companies. Names such as JD.Com Inc(ADR) (NASDAQ:JD), Autohome Inc (ADR) (NYSE:ATHM) and YY Inc (ADR) (NASDAQ:YY) witnessed massive gains.
The data was particularly important for BABA because it implied manufacturing expansion. Furthermore, the survey used to populate the report focused on small to mid-sized businesses.
In order for Alibaba to continue its impressive growth trajectory, it needs the Chinese economy to cooperate. On the surface level, the company is getting exactly that; hence, the jump in Alibaba stock.
The sharp rise in market value was also significant from a technical perspective. Since mid-August of last year, BABA stock has been strangely volatile. Shares would spike up, only to fall back down and repeat the pattern. By early December, it appeared that Alibaba stock was forming a bearish broadening wedge formation.
With the latest swing up, it appears as though investors have regained confidence in the company. No one will argue against a 6.5% single-day profit. However, technical analysts consider the aforementioned broadening wedge a difficult pattern to interpret. And on a similar note, I think investors should be cautious on Alibaba stock: one day won’t make the entire year.
Alibaba Stock Has a China Problem
But what about the strong economic data? Doesn’t that prove that BABA stock is a shrewd investment? While I agree that the reports are encouraging, we shouldn’t get too far ahead of ourselves.
Primarily, we’re dealing with China. Forgive me if I sound anachronistic, but last time I checked, China is a communist country. We, on the other hand, pride ourselves in our capitalist ethos. Obviously, capitalism and communism are like oil and water.
This isn’t just an ideological difference. Almost a week ago, President Donald Trump lashed out via Twitter Inc‘s (NYSE:TWTR) social-media platform, accusing China of aiding North Korea. The Chinese are not used to being blatantly called out for their duplicity. If recent diplomatic overtures fail, the Chinese can expect more Trumpisms. That surely is not helpful for Alibaba stock.
Moreover, I think America is generally willing to stick it to China in a way previously unimaginable. In prior administrations, Americans viewed the Asian powerhouse as a necessary evil. We didn’t care for their communism, their human rights violations and their double-tongued rhetoric. But we also didn’t want to push them too far. After all, we need to satisfy our cravings for cheap junk at Wal-Mart Stores Inc (NYSE:WMT).
While we still buy our cheap Chinese junk, we now live politically in a brave new world. Yes, we’ll buy Chinese, but we’ll also criticize them without fear of reprisal. I wonder how long China’s government will tolerate our newfound hubris. If positive U.S.-China relations were good for Alibaba stock, isn’t the opposite also true?
Frosty U.S.-China Relations a Worry for BABA Stock
Even if China begrudgingly stomachs our “America … heck yeah!” attitude, we still have the North Korea situation. I’m not confident that the geopolitical crisis will resolve in an acceptable manner. If that’s the case, I don’t think Trump will think twice about putting the screws on China. This forces China to respond, and eventually, BABA stock suffers.
I also believe that we’re already witnessing the “fruits” of President Trump’s aggressive foreign policy. The Committee on Foreign Investment put the kibosh on a proposed merger between Moneygram International Inc (NASDAQ:MGI) and Ant Financial Services, which is an Alibaba subsidiary. Subsequently, MGI had a modest session that did nothing to solve their valuation woes. In contrast, Alibaba stock soared.
To be clear, I’m not accusing the Trump administration of directly influencing the merger decision. However, I think it’s fair to say, let’s read between the lines. We’re not having a great relationship with China. Indeed, we’re not having a great relationship with any Asian country, unless you consider Russia to be an Asian country.
The way I see the dominoes falling, BABA stock may be on borrowed time. Yes, it has enjoyed an incredible run since February of 2016, I will not deny that. But with so much drama occurring, not to mention that ugly broadening wedge, I’d take some profits off the table.
As of this writing, Josh Enomoto did not hold a position in any of the aforementioned securities.