Should You Buy the Dips in Chinese Stocks?

Should You Buy the Dips in Chinese Stocks?

Posted On August 24, 2021 2:54 pm

Chinese stocks have been in a meltdown for several months as its President/Dictator Xi Jinping has instituted policies, called the Personal Information Protection Law, to stem the power of large tech firms while attempting to revert to their socialist roots of wealth redistribution

The Shanghai Composite Index (SHA) is now down some 22% from its February highs.

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shanghai composite index sha chart

It gets worse when you look at the big cap tech — an initial crackdown target. This included Alibaba (BABA), DiDi (DIDI), and Pinduoduo (PDD) to name a few. Another name added to the growing list is Tal Education (TAL).  Not a good look with U.S. markets — as measured by the S&P 500 Index (SPY) — being up 17% to all-time highs. You can view the great divergence in the following chart: 

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spdr stock chart 2021

Today, there’s a plethora of stocks such as BABA, PDD, and JD.com (JD), enjoying a big pop today off solid earnings reports.  The question now is whether this a buying opportunity, or simply a dead cat bounce, another chance to unload, or even short China stocks?

It’s complicated with a lot of moving parts. From a home-selling price limit (a wealth-creation contributor) to closing travel to a walled-in state-run economy.

Money manager savant, Cathi Woods, who runs the Ark Investor ETFs portfolio, has been exiting their China holdings in the past few months.  I certainly wouldn’t compare myself to her.  However, I agree with the premise that China-based stocks have become investable. 

I’m leaning towards the notion that this bounce, including a large amount of short-term short-covering, will be short-lived.  I’ll give it another day or two for names like BABA and PDD to approach resistance levels and then look to sell call credit spreads to establish limited-risk bearish positions. 

Stay tuned… 

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About author

Steve Smith

Steve Smith have been involved in all facets of the investment industry in a variety of roles ranging from speculator, educator, manager and advisor. This has taken him from the trading floors of Chicago to hedge funds on Wall Street to the world online. From 1987 to 1996, he served as a market maker at the Chicago Board of Options Exchange (CBOE) and Chicago Board of Trade (CBOT). From 1997 to 2007, he was a Senior Columnist and Managing Editor for TheStreet.com, handling their Option Alert and Short Report newsletters. The Option Alert was awarded the MIN “best business newsletter” in 2006. From 2009 to 2013, Smith was a Senior Columnist and Managing Editor for Minyanville’s OptionSmith newsletter, as well as a Risk Manager Consultant for New Vernon Capital LLC. Smith acted as an advisor to build models and option strategies to reduce portfolio exposure and enhance returns for the four main funds. Since 2015, he has worked for Adam Mesh Trading Group. There, he has managed Options360 and Earning 360, been co-leader of Option Academy, and contributed to The Option Specialist website.