We use cookies to understand how you use our site and to improve your experience. This includes personalizing content and advertising. To learn more, click here. By continuing to use our site, you accept our use of cookies, revised Privacy Policy and Terms of Service.
You are being directed to ZacksTrade, a division of LBMZ Securities and licensed broker-dealer. ZacksTrade and Zacks.com are separate companies. The web link between the two companies is not a solicitation or offer to invest in a particular security or type of security. ZacksTrade does not endorse or adopt any particular investment strategy, any analyst opinion/rating/report or any approach to evaluating individual securities.
If you wish to go to ZacksTrade, click OK. If you do not, click Cancel.
On the night of September 23rd, the Chinese government announced a sweeping stimulus package that was above expectations. The Chinese stimulus package included monetary stimulus, which slashed mortgage rates to help rejuvenate China’s real estate market, which has been ailing years. A combination of depression-like sentiment, bargain-basement equity valuations, and heavy short interest sent Chinese stocks flying higher in their biggest rally in years. Chinese ADRs like JD.com ((JD - Free Report) ) and Futu Holdings ((FUTU - Free Report) ) are up more than 50% in the past month, while UP Fintech Holding ((TIGR - Free Report) ) soared a staggering 240% before retreating Tuesday!
Image Source: Zacks Investment Research
Chinese Stocks Suffer Worst Day Since Financial Crisis
Chinese stocks finally took a well-deserved breather after a multi-week face-ripping rally. The iShares China ETF ((FXI - Free Report) ) (a proxy for large-cap Chinese stocks) had soared from $25 to $37 over the past few weeks and gained ground in 11 of 13 sessions before retreating ~9% Tuesday. Several news sources quickly pointed out that the one-day drubbing in Chinese stocks was the worst since the heart of the Global Financial Crisis when former banking juggernaut Lehman Brothers went bust.
China: Should Investors Buy the Dip?
Though the one-day drop in Chinese stocks is painful for those who chased the bull move, such action is standard in the context of the mega short squeeze that has occurred. A 10% pullback in the depths of a bear market is entirely different from a 10% pullback after a significant short squeeze. For instance, FXI is giving back roughly 1/3 of its move higher. To give investors an idea of its strength, the stock is retreating to its short term 10-day moving average for the first time. The current level is a perfect place for investors who missed the initial bull move but didn’t chase strength and are likely to jump in at these levels.
Image Source: TradingView
Buybacks are a Bullish Catalyst
Alibaba ((BABA - Free Report) ), China’s leading e-commerce company, is worth watching as a proxy for investors. Like Apple ((AAPL - Free Report) ) years ago, BABA is driving its stock higher through buybacks. In fact, the company bought back its own shares nearly every day in September and buybacks totaled more than $4 billion in Q3. BABA paused buybacks as Chinese equities started squeezing, but I anticipate that the company will use the dip to resume buybacks, thus cutting the supply of shares and driving them higher.
Chinese Equities Remain Cheap
Despite the epic short squeeze in Chinese stocks, valuations remain historically cheap. For example, BABA’s price-to-sales ratio of ~2x is a fifth of what it was in 2020.
Image Source: Zacks Investment Research
Bottom Line
Chinese stocks cratered on Tuesday. However, the fundamentals and technical suggest that the pullback is likely a buying opportunity rather than a top.
See More Zacks Research for These Tickers
Normally $25 each - click below to receive one report FREE:
Image: Bigstock
Chinese Stocks Slump: Time to Buy the Dip?
China Stimulus Sparks Equities in 2024
On the night of September 23rd, the Chinese government announced a sweeping stimulus package that was above expectations. The Chinese stimulus package included monetary stimulus, which slashed mortgage rates to help rejuvenate China’s real estate market, which has been ailing years. A combination of depression-like sentiment, bargain-basement equity valuations, and heavy short interest sent Chinese stocks flying higher in their biggest rally in years. Chinese ADRs like JD.com ((JD - Free Report) ) and Futu Holdings ((FUTU - Free Report) ) are up more than 50% in the past month, while UP Fintech Holding ((TIGR - Free Report) ) soared a staggering 240% before retreating Tuesday!
Image Source: Zacks Investment Research
Chinese Stocks Suffer Worst Day Since Financial Crisis
Chinese stocks finally took a well-deserved breather after a multi-week face-ripping rally. The iShares China ETF ((FXI - Free Report) ) (a proxy for large-cap Chinese stocks) had soared from $25 to $37 over the past few weeks and gained ground in 11 of 13 sessions before retreating ~9% Tuesday. Several news sources quickly pointed out that the one-day drubbing in Chinese stocks was the worst since the heart of the Global Financial Crisis when former banking juggernaut Lehman Brothers went bust.
China: Should Investors Buy the Dip?
Though the one-day drop in Chinese stocks is painful for those who chased the bull move, such action is standard in the context of the mega short squeeze that has occurred. A 10% pullback in the depths of a bear market is entirely different from a 10% pullback after a significant short squeeze. For instance, FXI is giving back roughly 1/3 of its move higher. To give investors an idea of its strength, the stock is retreating to its short term 10-day moving average for the first time. The current level is a perfect place for investors who missed the initial bull move but didn’t chase strength and are likely to jump in at these levels.
Image Source: TradingView
Buybacks are a Bullish Catalyst
Alibaba ((BABA - Free Report) ), China’s leading e-commerce company, is worth watching as a proxy for investors. Like Apple ((AAPL - Free Report) ) years ago, BABA is driving its stock higher through buybacks. In fact, the company bought back its own shares nearly every day in September and buybacks totaled more than $4 billion in Q3. BABA paused buybacks as Chinese equities started squeezing, but I anticipate that the company will use the dip to resume buybacks, thus cutting the supply of shares and driving them higher.
Chinese Equities Remain Cheap
Despite the epic short squeeze in Chinese stocks, valuations remain historically cheap. For example, BABA’s price-to-sales ratio of ~2x is a fifth of what it was in 2020.
Image Source: Zacks Investment Research
Bottom Line
Chinese stocks cratered on Tuesday. However, the fundamentals and technical suggest that the pullback is likely a buying opportunity rather than a top.