China’s stock market is despised, in a bear market, and oversold.
Which makes for a great buying opportunity!
And today, I want to show you a few of the Chinese stock trades I’m considering for my own accounts.
A Three-Year Bear Market
Chinese stocks have been disappointing investors for more than three years, with the brief exception of a 3-month rally at the end of 2022.
The problems have been well documented…
China’s economy export-based economy is faltering… The pandemic caused international customers to adjust supply chains and cut many Chinese manufacturers out of the picture… China’s unemployment level is high — to the point where the country is no longer reporting the embarrassing statistics.
And the much anticipated Chinese reopening fizzled out immediately. In short, the country has been unable to get its act together and recover from draconian lockdown measures.
So it’s no wonder Chinese stocks have been trending sharply lower. You can see this pattern in the chart of the iShares China Large Cap ETF (FXI) below:
This year, the index has been testing the lows from 15 months ago. And it appears the low from October 2022 is holding.
Government Support and FOMO
China’s leadership has been making some big political shifts, in an attempt to restart the country’s economy.
These shifts include relaxing lending standards, injecting capital into the economy, and most recently directly investing government funds into the Chinese stock market.
As a free market capitalist, I’m skeptical of the long-term benefits of these policies. We know that too much government intervention can actually harm economic expansion by directing capital into less efficient areas of the economy.
But in the short-run, these policies can ignite stock market rallies — which create huge opportunities for traders.
At the same time these policies are being put into place, investor sentiment has been extremely sour. After three years of disappointing returns, many Chinese investors have lost hope.
Bloomberg recently reported that Chinese margin loans declined by the largest amount since 2016. Part of this was likely due to margin calls where investors were forced to liquidate positions. And margin loans also dropped because investors just became too pessimistic and no longer wanted to borrow money to buy stocks.
This leaves the Chinese stock market in a place where many investors are on the sidelines, just as the government steps in to artificially support stock prices.
My guess is that this bearish sentiment, coupled with heavy-handed political pressure will result in a strong counter-trend rally that could last 6 months or so.
Remember, some of the most vicious stock market rallies occur during long-term bear markets. This is because investors become concerned that they missed the bottom. And that fear of missing out (FOMO) drives new buy orders.
Capitalizing on a China Stock Rebound
I’m tracking quite a few opportunities to profit from a rebound in Chinese stocks.
On a very basic level, it makes sense to buy shares of FXI — to take a diversified position in a broad group of Chinese stocks.
I also like the idea of looking through the holdings of this fund, and investing in specific Chinese stocks that trade on U.S. exchanges. I’ve got a personal position in Alibaba Group Holding (BABA) through my Speculative Trading Program. And I’m watching a few others for possible trades.
Thanks to the risk and uncertainty in this market, option prices for Chinese stocks tend to be relatively high. This creates a great opportunity to sell put contracts for specific Chinese stocks and collect up-front income payments.
I use this strategy in my Accelerated Income Model — a real-money model portfolio that uses a unique strategy to collect up-front payments from stocks I would be willing to buy.
>>You can follow my real-money income trades here<<
The Chinese stock market carries plenty of risk as we can see by looking over the last three years of returns. But for speculative traders, there is an opportunity to make money from this area of the market as political pressure drives stocks higher, and the overall perception of this market shifts.
Here’s to growing and protecting your wealth!
Zach
