Most major stock markets are strong. In the U.S., the indices have never been higher. But there are pockets of weaknesses, and today we will discuss the one in Chinese stocks. This could be a huge opportunity brewing in a catch-up trade. On the other hand, it is also possible that China lagging is a major global cautionary flag.
China has been the growth engine of the world for a long while. Before the pandemic, it was clearly the benchmark that the rest of the countries were following. It has been pedal to the metal, trying to overtake the United States as the dominant economic force. The competition is real and they are fierce foes.
The great reset of 2020 created a slew of new dynamics along that front. Arguably the United States is pumping more cash into its economy now then China. Of course this is a gut statement since it’s hard to get tangibles there. At least it is safe to say that the U.S. is doing more than we have done ever before. This administration has gone hog wild with the fiscal and monetary bailouts.
Real growth is murky because of government interventions on all sides. The scoreboard shows that the U.S. indices are definitely winning. We keep setting records week after week in spite of heavy negative rhetoric. The bulls are excited to be up here, but they have one foot out the door. Chinese equities are lagging as a collective. There are success stories among them but they are too few to move the line.
Today we look at three Chinese stocks the strategize potential entry points in them. They are:
Chinese Stocks: Alibaba (BABA)
Few companies out there can match Alibaba’s ability to earn. It generated $75 billion in one day last year. Therefore at some point, the dip in BABA stock is a buying opportunity. However there is more than just business to consider. Co-founder Jack Ma committed a faux pas when he criticized the Chinese government. That opened the door for a massive skirmish that cost them big a lot of headaches.
First the authorities canceled the IPO of ANT Financial. They lost billions from those proceedings, and BABA stock collapsed because of fears of what more the government could do. Then Alibaba and its subsidiaries came under governmental scrutiny from many angles. This was a totally avoidable episode.
Last week we learned that BABA had to pay over $2 billion in fines for anti-monopolistic infractions. This was a record but not even 6% of its 2019 revenues. The assumption was that this penalty would be the end it. The stock rallied 11% on the headline from relief. However, there are still rumblings that they are still going after Jack Ma. There could be more drama to come.
This is all to say that investing in BABA stocks is still a complicated matter. Aside from the usually economic success, there are political risks to stock price performance.
Technically, in 2018 the stock failed to break through $210 for share. It then took it over a year to do that with force. In fact it did so during the recovery from the pandemic, it soared to $319 per share. But that marked the phenomenal top followed by a drop 34% drop. For the last few months, it has found support where it had resistance in 2018. Headlines aside, this should be solid footing, and therein lies today’s opportunity.
There is tremendous risk if for whatever reason loses the neckline it’s going for a ride to $180 per share. This is not my forecast, but it is a scenario that exists. Investors should use only partial positions to leave room to add more size later.
About this time last year, BIDU stock was in shambles. It was trying to dig out of a deep hole, buried under $110 per share. It is now 100% higher and still facing stiff resistance above it. Luckily the fundamentals are still strong and management is still strong. They are at the forefront of many opportunities in the largest market on earth. They are even in the self-driving arena, which is going to be huge in the next decade.
Successful companies are not limiting themselves to one skill or another. Smart management teams are reaching for successes well outside of core competencies. Perhaps these are tricks they learned from Amazon (NASDAQ:AMZN).
Technically, BIDU stock has a clear opportunity waiting for it above $230 per share. Also the bulls have a strong base below which has been support for almost a decade. If there are no systemic shocks, the bulls have the tails winds they need to burst through. The reward could be a $50 rally. There will be tremendous resistance going into $260 when they get there.
The risk to the rally would be losing $173 per share. This should serve as a stop-out point from a trading perspective. The target of the bearish patterns that could unfold would be much lower. Savvy traders would not want to be on board to find out how deep. This is not my assumption and is the improbable outcome. Therefore looking up at this juncture is the right assumption for BIDU.
iShares China Large-Cap ETF (FXI)
Instead of trying to pick single winners, sometimes it’s easier to bet on the bunch. That’s what the FXI offers now is a chance to bet on mega-cap Chinese stocks with one ticker. BABA is the largest of its components, but there are other big named like JD.com (NASDAQ:JD). The advantage of using an ETF is that it spreads the headline risk. Situations like the BABA recent saga would have smaller impact on it.
The fundamentals are solid since the components are the top Chinese stocks. The technicals on the charts is where the opportunities is clearest. The FXI is holding a support zone that is 14 years old. Contention zones like this usually offer great defense. The bulls can use this as a base to attack the opportunities above.
If the FXI stock can rise above $50 per share it would catch another bid. Momentum buyers like chase strength. The strategy would then become to buy high and sell higher. However, immediately they would also encounter long term resistance. This means that for this rally to work, markets in general would also need to cooperate.
The Chinese markets lagging could be a warning sign for global markets. FOMO could have serious consequences, so patience is a virtue. The FXI opportunity was great last year. But it could be flashing the yellow light and the U.S. market are not paying attention.
On the date of publication, Nicolas Chahine did not have (either directly or indirectly) any positions in the securities mentioned in this article.
Nicolas Chahine is the managing director of SellSpreads.com.