It’s Time to Take Profits on China

It’s time to get out of China.

Not quite four months ago, we said it was a good idea to follow Wall Street’s bigwigs into the Chinese market.

The Chinese government had announced a massive stimulus package. Famous hedge fund manager, David Tepper, had pleaded with CNBC viewers to “Buy everything China.” And, many of the big-name fund managers on Wall Street were building large positions in Chinese stocks.

Despite all of this potentially bullish activity, Chinese stocks were still stuck near their lows for the year.

Alibaba (BABA) was trading near $82 per share. JD.com (JD) was at $34. Pinduoduo (PDD) was trading at $95. And, the triple-leveraged FTSE China Bull ETF (YINN) was barely $25 per share.

We figured Wall Street’s billionaires probably knew what they were doing. So, we suggested it was a good idea to ride their red coattails.

As of last Friday, BABA was trading up 76%. JD.com is 30% higher. PDD has gained 25%. And, YINN is up a whopping 84%.

Those are remarkable gains for just four months.

Take Your Gains

Now though, it’s time to take those gains off the table.

We don’t know yet if Wall Street’s bigwigs are taking profits on their Chinese holdings. They’re not required to report changes in their positions until the end of this month. But, there are other factors that suggest it is time for traders to take the short-term gains off the table.

First off, investor sentiment (a contrary indicator) has done a complete reversal – from wildly bearish to overwhelmingly bullish.

Almost no one wanted to own Chinese stocks last November. Even after all the Wall Street bigwigs reported their large investments in China, the financial media talking heads remained bearish. “You can’t trust China,” they said. “Their numbers are fake. The government manipulates the data. Put your money anywhere but China.”

Today, after a stunning rally, the financial media loves China. “Buy Buy Buy,” screams one talking head. “Government stimulus is a big-time positive factor,” argues another.

Investors who wanted nothing to do with Chinese stocks when they were wickedly oversold last November are suddenly willing to chase the stocks higher into wildly overbought conditions today.

That’s probably a bad idea.

Look at this chart of Alibaba (BABA), perhaps the most popular of the Chinese stocks, plotted along with its 50-day moving average (MA) line…

BABA rarely trades more than 12% away from its 50-day MA before reversing course and heading back towards the line. In October, BABA traded almost 30% above its 50-day MA – following the announcement of China’s stimulus package.

The stock gave up all of those gains over the next several weeks.

Today, BABA is once again in an extremely overbought condition. The stock is trading 35% above its 50-day moving average line. And, all of the momentum indicators at the bottom of the chart are in overbought territory.

This condition suggests that any immediate upside from here is limited.

The stock is likely to either mark time for a while and give the 50-day MA a chance to rally up towards the current price. Or, BABA needs to fall back towards the 50-day MA.

Either way, the risk/reward setup for buying China right now is unfavorable. Traders who bought Chinese stocks on our suggestion in November should take some profits off the table.

Best regards and good trading,

Jeff Clark
Editor, Market Minute