Why Are We Buying Chinese Internet Stocks?

by JC Parets  -  May 6, 2019

With the CSI China Internet Index closing at new seven-month highs last week, have we already seen the move? Or are we just getting started?

One thing we know for sure by studying history is that stock prices trend. That’s why technical analysis works. These tools help us identify those trends.

Many academics will tell you that these consistent series of higher highs and higher lows over time are just random. The truth is you can show these charts to a five-year old and the kid will tell you that, yes, this stock is going up, or, no, this stock is going down. You can even argue that a trend is sideways, but that is “trend recognition” nonetheless.

It’s very clear that markets trend, particularly stocks. They go up over time, and they go down over time. A stock making new highs has a higher likelihood of continuing to make new highs versus turning around and beginning a new trend.

“An object in motion tends to stay in motion,” is how Sir Isaac Newton put it. It’s the same in stocks, which are driven by e-motion. (See what I did there?)

With the CSI China Internet Index holding above key levels, I think the path of least resistance is over 10% higher. If KraneShares CSI China Internet ETF (NYSEArca: KWEB) is above $49, I like this group of stocks, higher:

Two-year history of the KraneShares CSI China Internet ETF (NYSEArca: KWEB).

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Here’s KWEB compared to the more traditional iShares China Large-Cap ETF (NYSEArca: FXI). If these internet stocks keep doing well, China, as a whole, is likely to do the same. That’s a big piece of the bullish emerging market story we’ve been talking about all year:

Long-term comparison of the KraneShares CSI China Internet ETF (NYSEArca: KWEB) and the iShares China Large-Cap ETF (NYSEArca: FXI).

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If KWEB is below $49, that’s most likely happening in an environment where the U.S. dollar is rallying and stocks are falling.

The weight of the evidence suggests to me that this is the lower-probability outcome. I’m still in the camp with those who think the U.S. dollar weakens and emerging markets and other dollar-sensitive assets do well.

How about you?

Listen: Existential Risk vs. Resource Risk

Back in March, I climbed up the Highlands Bowl in Aspen for the first time. Four or five turns in, my skis popped off and I tumbled down the entire mountain. About 100 yards later, there I was hanging off the side of the cliff waiting for ski patrol to come help me.

Miraculously, it took them less than 20 minutes to find us and bring my skis down to where I was. Even though I was perfectly fine, my body overreacted to the existential risks. The primitive parts of my brain took over the duties of what other parts usually handle.

I’ve had similar feelings before… after experiencing bad losses in the market. That’s the starting point for the latest episode of the “Money Game” podcast on Technical Analysis Radio.

Phil Pearlman does an amazing job explaining the differences and similarities between these two types of risk and why my body reacted the way it did. Give it a listen

Here are a few shots I took during this whole experience…

This is what the bowl looks like on a nice day. There was no visibility when we climbed up. The arrow points to where the tumbling took place.

Skis on my back and ready to hike.

This is what we came for.

The Ski Patrol was The Man.

To wise investing,

J.C. Parets
Editor, Big Market Trends