The China syndrome
07/18/18

When someone mentions “China” these days, people can be excused for immediately thinking “tariffs” and not much more.

That’s been the China story recently—to the exclusion of almost everything else. For instance, do you have any idea how the Chinese stock market has been doing lately?

It’s probably no secret that Chinese stocks staged an uber-rally a few years ago, with the SSE Composite Index (SHCOMP) more than doubling between June 2014 and June 2015 (see weekly chart below). By February 2016, though, the index had been more or less cut in half, at which point it began snaking its way higher, ultimately gaining around 32% before turning lower with most other markets in February of this year.

SSE Composite Index (SHCOMP), 6/1/13 – 7/17/18. SSE Composite Index price chart. Chinese stocks. China stock market.

Source: YahooFinance (data)

In June the SSE Composite broke below a support level (hmm…perhaps tariff threats rattle investors on both side of the Pacific?) and, by early July, approached its 2016 lows before bouncing the past couple of weeks.

Chinese video gaming and e-commerce company NetEase (NTES) has mirrored the SSE Composite in that it has been under the paw of bears in recent months, broke below support, and began to rally after approaching a one-and-a-half-year low a little above its December 2016 lows:

NetEase (NTES), 12/3/12 – 7/17/18. NetEase (NTES) weekly price chart.

Source: OptionsHouse

Perhaps because it currently operates exclusively in the People’s Republic (although it trades exclusively on the Nasdaq), NTES—which rallied from below $50 in early 2013 to above $375 in December 2017—hasn’t gotten the press that some other Chinese stocks, such as Alibaba (BABA) and Baidu (BIDU), have received. Over the past five years NTES has sported annual growth of 24% and a 46% annual increase in sales.1 It’s also in the midst of a $2 billion share buyback program,2 and got an upgrade to “overweight” last month from JPMorgan.3

Is the stock’s correction over? The daily chart below shows NTES has recently consolidated right at the resistance level defined by its May high. As of yesterday the stock was up around 20% from its late-May low, and had formed its first higher swing low and high since late 2017.

NetEase (NTES), 1/4/18 – 7/17/18. NetEase (NTES) daily price chart. Consolidation at resistance

Source: OptionsHouse

In this sense, the current short-term range is similar to the range-within-a-range scenario discussed in “Timing volatility surges”: A volatility contraction is occurring as prices push against a technical level in the direction of the current trend, which until proven otherwise, is up. The stock’s 28.07% historical volatility yesterday put it at the low end of its 52-week range of 21%–70%. If and when volatility resumes…

Another factor is the resurgence in tech, which last week reassumed its role as market leader. It’s too early to tell if the bounce in the SSE Composite will have legs, but if it does, it could provide a boost to the current tech tailwinds that may help lift stocks like NTES.

Market Mover Update: Netflix (NFLX) sold off around 17%—more than $67 to $342—in after-hours trading on Monday after its quarterly earnings call revealed the company added fewer new users than analysts had estimated. But the stock rallied furiously during yesterday’s regular trading session to pare that loss to less than -4% at one point, rallying as high as $385.

 

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1 Motley Fool. Why Is No One Talking About NetEase Inc. Stock? 5/29/18.

2 MarketWatch. NetEase doubles stock repurchase program to $2 billion. 6/11/18.

3 Investor’s Business Daily. Stocks Jump Into Short Session; Oil Prices Climb, NetEase Upgraded. 7/3/18.