Many investors have poured money into China. It has a cheap labor force, although wages are going up. And it has a huge internal market. But, China also has lots of problems like the political unrest and pro-democracy demonstrations in Hong Kong. Our opinion is that swing trading Chinese stocks can be more profitable than investing in them. We wrote recently about the Alibaba IPO and Trading the Fall of Alibaba. Alibaba is trading heavily at the open and close and the price has fallen two dollars a share from where the stock opened it IPO. Our take is that there is not much happening to this stock but that it will move when quarterly financials come in. Anticipating how well the company is doing will give traders an advantage for swing trading Chinese stocks like Alibaba. In the meantime technical analysis can be applied to any high volume Chinese stock in search of short term profits. Our belief is that the Chinese economy is in trouble as is the ruling hierarchy. Given the non-transparent nature of the Chinese economy and Chinese politics, technical analysis may not always be a useful approach. But anticipating how things will evolve on the mainland may be easier. Thus swing trading Chinese stocks may be a more effective way to make a profit.
What to Trade?
We suggested a year ago that it might be time to short the Chinese stock market. Consider ADRs of Chinese companies. China has become an industrial powerhouse and borrowed along the way. It has attracted huge amounts of foreign investment. The thinking is that no one wanted to be left out of a huge economic advance in an economy that routinely grew at 10% per year. Precise timing may depend on careful analysis of stocks that trade as ADRs in the USA, buying options on Chinese stocks that trade in the USA and research to understand which stocks could be hurt by a burst real estate bubble, a contraction of manufacturing or wide spread civil unrest. Although it can be hard to judge what is happening in China day by day one can see that change is in the air. There is dictatorial hierarchy that wants to keep power. They are juggling all sorts of issues in order to keep a lid on social unrest. But, the Chinese have had a taste of freedom and it may be hard to keep that under wraps forever. Anticipating which stocks will be helped and which will be hurt by coming events will lead to profits when swing trading Chinese stocks.
Chinese Stocks to Short
Let us start with Alibaba. This was the biggest IPO ever. However, stock holders are buying part of a company in the Cayman Islands. And what they are buying is only a part of a network of companies and they are getting to say in management! Our belief is that when the first bad financials come in that Alibaba will fall like a rock. As a general comparison Chinese stocks listed on US exchanges typically lose about a percent a year whereas US companies average a seven percent per year gain. In the twenty years ending in 2013 the Chinese economy grew seven fold and stocks on the average provided an eight percent ROI! The level 1 ADR stocks have high reporting requirements and are thus safer to trade. Anything else should probably be avoided. As always only trade what you understand and check out any and all tips.
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