In breaking news on Wednesday, President Trump announced that he would delay scheduled tariffs against China by two weeks. As he put it, the delay represents a goodwill gesture to China, and comes at the request of China’s Vice Premier, Liu He. And on the surface, this development seemingly bodes well for JD.com (NASDAQ:JD) and by extension JD.com stock.
After jumping to a strong start earlier this year, JD stock encountered upside resistance around the $31 level. In the beginning of April, shares tried to break past this level, but failed, sparking a downward slide. Later in May, JD.com stock tried to break beyond $31, but the markets again stymied the effort.
During the past summer, the e-commerce and technology firm enjoyed some strong sessions. In fact, JD.com stock moved beyond the aforementioned resistance level a few times. Unfortunately, the efforts ultimately went for naught.
In the one-year chart for JD stock, we can clearly see a consolidation pattern. As InvestorPlace‘s Tom Taulli noted recently, this pattern is setting shares up for either a breakout or a breakdown. My colleague argues for the former, noting some strong fundamental catalysts. These include a robust and growing Chinese middle class, greater allocation of Chinese GDP to domestic consumption, and an upwardly moving e-commerce market.
Significantly, Taulli also mentioned that the trade war could be beneficial for JD stock. That’s because the dispute has driven China to focus on its domestic economy, bolstering JD in the process.
With this latest gesture from an otherwise strident Trump, it seems the case for JD.com stock breaking out is won. So, should you act on this diplomatic news?
JD.com Stock Remains Unconvincing
Obviously, President Trump extending a small but meaningful olive branch is important. In the nearer term, no one should be surprised to see names like Alibaba Group (NYSE:BABA) and Tencent (OTCMKTS:TCEHY) jump higher.
When it comes to China-related developments, the news seemingly kept getting darker for JD stock. With the U.S. and Chinese administration set to discuss their differences, this is the positive narrative that the bulls needed.
But the story doesn’t end there. Even from early in his administration, President Trump earned a reputation for flip-flopping. Granted, every politician contradicts themselves; otherwise, they wouldn’t be politicians. That said, Trump can turn on a dime.
Infamously, Trump stated in 2017 that North Korea will be met with “fire and fury” if the hermit nation threatened the U.S. In June of this year, Trump characterized his relationship with North Korean dictator Kim Jong Un as a “great friendship.”
Therefore, JD.com stock has a credibility problem, but it has nothing to do with the underlying company. Instead, we really don’t know what’s going to happen next. Of course, uncertainty is something that Wall Street dislikes.
I’m not sure what the probabilities are regarding a trade deal in the nearer term. But based on Trump’s unpredictable nature, I wouldn’t bet too high on a resolution. Remember, Trump must look strong to his voting base because he’s losing support elsewhere.
Therefore, if a deal doesn’t materialize, JD stock risks significant volatility. While many China bulls tout the country’s massive middle class, we got to put those numbers into context. With a population size of over 1.4 billion people, on a GDP-per-capita basis, the Chinese are still poor. Plus, initiatives to push into China’s lower-ranked cities may not pan out due in part to the country’s sizable percentage of agricultural workers.
What Happens If We Get a Deal?
Suppose though that we do get a deal. Does that optimistic scenario spell game on for JD.com stock?
Here again, I remain hesitant. I hate to bring up a politically controversial subject, but questions exist regarding China’s economic data. For instance, in June of this year, the Chinese city of Guanghan allegedly falsified its economic data.
This scandal brings up an uncomfortable topic: when we say that China’s middle class is growing robustly, what data is that based on?
Additionally, I’m inclined to believe the negative reports as opposed to the fluff stats. Because if China’s middle class is booming, why are their auto sales plummeting? Other metrics are falling too. A trade deal probably won’t fix these core problems.
Therefore, the smart move is likely to wait out JD stock. Sure, the technical pattern is interesting. But with a volatile President and an even more volatile economic situation, gambling here seems more risky than rewarding.
As of this writing, Josh Enomoto did not hold a position in any of the aforementioned securities.
