JD.com (NASDAQ:JD) stock had its great moments. But lately it seems that for every step forward, it suffers a few steps back. It’s not the company’s fault — it’s stuck in a whirlwind of geopolitical headlines wreaking havoc on investor sentiment.
We have been dealing with headline risk for over a year. And just when we thought that we had a handle on those headlines, Wall Street learned about a new set of worries. Bloomberg reported that the White House is contemplating restricting the flow of U.S. investments into China.
The knee-jerk reaction was to sell all Chinese stocks like JD.com and Alibaba (NYSE:BABA). They fell over 5% in mere hours. It was sector-wide panic.
Rumors and Risks
Most of these headlines are rumors. But even though most don’t change the fundamentals, they disrupt price action. For now, these rumors are unavoidable noise. This morning White House trade advisor Peter Navarro called the Friday headlines “fake news.”
This is little solace to those who lost money on Friday.
China’s stocks have been under pressure for over a year thanks to the U.S.-China trade war. But you couldn’t tell that from JD.com stock, as it is up 30% year-to-date. So on the face of it, JD is out performing the S&P 500, but the relative performance metric is misleading. JD is still down 40% from its all-time highs whereas the stock markets are toying with a breakout from theirs.
Not only is JD stock lagging the market, it is also close to important support zones below that could be trap doors. So caution is warranted when investing. First, there are the geopolitical risks from the economic war. Clearly politicians are unpredictable, and Friday’s rumors could be based on some truths. We don’t really know everything and there may be more tape bombs lurking.
Fundamentally, JD.com stock is not cheap. It sells at a trailing price-to-earnings ratio just over 45, 40% higher than those of Alphabet (NASDAQ:GOOG, NASDAQ:GOOGL) and Facebook (NASDAQ:FB).
Add to this the potential opacity issues of Chinese companies and you get an additional risk to that P/E. The U.S. would eventually want to stop investors committing capital to questionable financial reports. The report from Friday is so far fake news, but where there is smoke there is perhaps a fire brewing.
JD.com Stock Still Has Opportunities
They say that with no risk, there is no return. So catching the JD stock falling knife now may turn out to be a winning trade. But it does carry a lot of unusual risk. These are rare headlines so there are no rules to playing them. Investors who brave this risk better know that they are swimming in new waters so they should do it with very tight stops.
Technically JD has important zones to hold so not to exacerbate matters. The zone around $26 per share was pivotal to the breakouts this year. It should provide support, but if it fails then the price would fall into the clutches of an even more important pivotal zone.
In the last five years, JD tested the lows twice. In spite of having a lot of technical support between its current price and $20, if the lows are breached they would open an abyss. Although this is not imminent it is important to know the risk exists.
But with risk comes opportunity. If JD.com stock bulls hold above the August lows then they could target $30 quickly. There is heavy resistance near there as it is the point of control from the volume profile. If and once prices get there, the buyers and sellers will fight it out hard. Meaning those who buy the dip should know where to lock in their profits. But above $32, JD stock would be in open space that would target $36 per share.
So buying the dip here in JD depends on investor time frames and intentions. Trading the dip is a better idea since it doesn’t commit funds for a long period of time and usually has a tight stop loss below. But investing in the JD dip for the long term now carries a lot of assumptions that are very cloudy. This clearly restricts the homework that is required for determining if the JD future is rosy in the U.S. market.
Moreover, the immediate fate of JD stock rests on the flow of headlines. The U.S. and China have been cordial of late, but the outcome of that sentiment is hazy. Add to it the complication of the Hong Kong situation and we have too many questions to do anything with conviction.
Nicolas Chahine is the managing director of SellSpreads.com. As of this writing, he did not hold a position in any of the aforementioned securities. Join his live chat room for free here.
