By: Steve Smith
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.
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:
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.