Rotating East (BIDU, FXI)

Rolling towards the end of the year always inspires confidence, hope and beneficence, and here at Normandy we’re no different.

We’re grateful for the trading success we’ve had over the last twelve months. For those who’ve been with us, you know that Options Trader Elite has racked up a bounty of success over that period, and we’re humbled, too, by the growing number of subscribers who are joining our ranks, profiting from our rantings and giggling at our antics.

For that, we thank you all.

thanks

Without getting too carried away, however, we also recognize that there are always two sides to a trade, and that some have been less fortunate than we in 2014. To that end, we bid those of you who’ve been ‘cold’ nothing but success in the coming year, and pray that it doesn’t come at our expense!

So, too, in the wide world of trading…

 

The investment seesaw is ever rocking…

What the pros on Wall Street call ‘sector rotation’ is, in fact, just a fancy term for chasing a neglected group of stocks. And in a bull market it’s a certainty that every few months the limelight grows dim on the latest stock-buying fad, and hearts (and the media) are pulled toward the next must-own group of equities.

And that’s precisely what’s happening now in China.

As a result of recent market liberalization policies in that country allowing foreigners to hold onshore Chinese stocks, the Shanghai market has been borne aloft. New brokerage accounts – mostly from Hong Kong – have surged, and the amount of money now streaming into mainland Chinese equities has ballooned in stride.

Have a look here –

chinesebrokerage

2014 has been a banner year for the brokerage industry in Hong Kong, but if this alone accounted for the rise in the Chinese market, we’d be skeptical. More than that, we’d suggest that we’ve reached an interim market top here, and it’s time to bail out.

Indeed, after the rise we’ve seen of late, it could well be that Shanghai has plateaued. But if that’s the case, it’s only temporary. Why? Because investors are only now picking up the China scent, and the next great ‘rotation’ of funds, we believe, is about to roll toward Shanghai.

Look at the iShares China Large Cap ETF (NYSE:FXI), a proxy for the Shanghai market (though comprised of only the 25 biggest companies on that exchange) –

This is her chart from early 2008 –

fxi129
The technicals paint a very clear picture –

• The blue circle on the chart shows a promising breakout and retest (completed in September).

• RSI and MACD also give the weekly chart a BUY signal (black boxes), as both are trending comfortably above their respective waterlines, while

• All the major weekly moving averages are also trending higher.

Taken together, FXI looks to be an intermediate term BUY.

Or,

China is about to get hot, while our own indexes get rotated toward a (temporary) back seat.

What?!Six years in decline!

 

No, not to worry, my little Juniper. Just a little excitement in the Far East to cool the jets of those invested here, stateside. And when the champagne and enthusiasm run out on the Yangtze, you can be sure that we’ll once again put on our party hats here on the Hudson.

Look now at the daily chart for the last six months –

fxi1292
Here we see a slightly different picture.

• While it’s clear from the blue circle that the moving averages are all unfurled (for the first time in almost seven years!) and are trending higher,

• And we’re closing in on 52 week highs (black line), and

• RSI and MACD are supportive of ongoing strength in Shanghai (in green),

We worry that the latest move is a tad extended.

Why?

1. Well, in the first place, there are a great many trading gaps that have opened in recent weeks as the China phenomenon has taken hold.

2. But more recently – indeed, on Monday of this week – we saw a bearish engulfing pattern (enlarged, in yellow) that speaks to an imminent decline in price for FXI.

And with that in mind, we’re going to assert the following – that China is back, no two ways about it. But that the broad Chinese market is not the best way to play the latest rotation of cash eastward.

So how do we do it?

 

Glad you asked.

And the answer is, by way of one of our favorite stocks on the Chinese market – and one we just employed for a sizeable gain five weeks ago in a letter called Looking for a Threepeat.

The company is called Baidu Inc. (NASDAQ:BIDU). It’s the Chinese Google and it has been moving very nicely of late.

Have a look at the chart to begin –

bidu129
After moving sideways for several months, BIDU stock broke out to new highs in late October and has been establishing a new trading range ever since. Denoted by the blue lines at the top, the current range falls between $230, its former resistance level, and $250, current resistance.

Former resistance is now support, of course, and that’s precisely where we find the stock today.

It’s for that we reason that we believe that BIDU stock is cheap. Because regardless of any pullback in the broader Chinese market, BIDU has proven itself a powerhouse, the Nimitz of the Chinese big-cap fleet, and we can’t see it losing significant ground here, particularly with new interest kindling in Shanghai.

The more likely scenario is that Baidu will be lavished with funds as U.S. investors come to see the potency of the Chinese opportunity.

PUT Sale, CALL Purchase

 

We’re going to play BIDU in a bi-directional manner here, betting on a short term bottoming period and a then on longer-term rise.

In practice, it looks like this –

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[mepr-rule id=”204″ ifallowed=”show” description=“options_trader_elite_members_only”]

Options Trader Elite recommends you consider selling the BIDU January 9th 210 PUT for $2.34 and buying the BIDU February 260 CALL for $4.15. Total debt on the trade is $1.81.

[/mepr-rule]

[mepr-rule id=”988″ ifallowed=”show” description=”executive_lounge_members_only”]

Options Trader Elite recommends you consider selling the BIDU January 9th 210 PUT for $2.34 and buying the BIDU February 260 CALL for $4.15. Total debt on the trade is $1.81.

[/mepr-rule]

With love of the hunt,

Hugh L. O’Haynew, Senior Analyst, Normandy Research

See what people are saying...

  1. Gavin Glover

    Hi Guys Not sure if this is my browser but trade not showing up. Plse resend article with trade. Many thanks gavin

  2. Alfred Olbrycht

    Mr. O’Haynew,

    Re: “BIDU stock broke out to new highs in late October and has been establishing a new trading range ever since. Denoted by the blue lines at the top, the current range falls between $230, its former resistance level, and $250, current resistance.

    Former resistance is now support, of course, and that’s precisely where we find the stock today.”

    A closer exmination would show that on 12/09 intraday by quite a bit and on a closing basis FXI spent most of the time beneath your $230 support closing at $229.90. Perhaps wise to wait a bit beore turning bullish?

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