While we were wringing our hands over the market correction at home, the Chinese market has snuck up to new highs, with strength that has caught most by surprise.
Shanghai Se Composite
The Shanghai index looked like it might have been heading for some significant problems in early March and mid-May. Since then, the Shanghai Composite pulled it together and formed a large bullish continuation pattern within the long-term uptrend. This is impressive strength, and while this market is extremely volatile due to its small relative size, the Shanghai Index looks like it wants to continue trending higher.
There are some significant opportunities and pitfalls involved with investing in China. The growth potential is almost mythic in proportions, as 1.3 billion people lurch toward a Western-style consumer economy. But there are hazards. Along with the rapid growth comes inflation and the potential for the Chinese central government to clamp down on liquidity to fight inflation at any time.
The corrective action we are currently seeing in U.S. markets may create an opportunity to buy the Chinese stocks that trade domestically while they are under pressure. And there are plenty of Chinese companies trading domestically, which makes it easy for investors to get involved. We have picked out a couple of names in the Internet sector that traders should take a look at right here.
is a Chinese Internet search company that is the "Chinese Google," and in fact,
has made an investment in the company.
BIDU has rallied strongly since May, and the stock gapped up sharply after the earnings report in July. It has formed a bullish consolidation at this level and is showing strong relative strength vs. the market's recent corrective action. Traders should look to get long BIDU here and look for the uptrend to resume once the market calms down.
Another interesting configuration, also a Chinese Internet stock, is Sohu.com
. Sohu.com is a Chinese Internet portal company, very similar to
Its stock has also rallied since May and just recently made a new high. SOHU is showing excellent relative strength vs. the broader market during this correction and has held a solid uptrend line since May. There's no question the bulls remain in control, in spite of the market selloff. The new highs suggest to us that the uptrend will continue in the coming weeks.
At the time of publication, John Hughes and Scott Maragioglio were long Baidu.com and Sohu.com. Hughes and Maragioglio co-founded Epiphany Equity Research, which has developed and utilizes proprietary tools to identify and track liquidity changes in the market indices and sectors. Hughes advises numerous asset managers, hedge funds and institutions managing in excess of $30 billion. Maragioglio is a member of the market technicians association (MTA) as well as The American Association of Professional Technical Analysts (AAPTA) and holds a Chartered Market Technician (CMT) designation. Maragioglio has also served on the board of directors of the AAPTA.