New Bull Market in Chinese Stocks

While the overall market remains trapped in a generally sideways range, certain areas are presenting major buy points.  One of them:  Chinese stocks, which after a year and a half of no progress, has emerged into a new uptrend that we believe will take the sector very far in the months ahead.

You can see what we’re talking about by taking a look at the weekly chart of the Golden Dragon Fund (PGJ), which tracks all of the Chinese ADRs traded right here in the U.S.  (This index is also the basis for our market timing system in Cabot Emerging Markets Investor.)  After soaring from 18 to 31 in 2013, the fund made no net progress during the next 18 months—as of March of this year, PGJ was actually down 10% from where it stood back in October 2013.

PGJ Stock Chart as of 5/20/2015 

However, as opposed to a huge decline, notice how the group found repeated support in the 26-27 area, building a solid foundation for an eventual advance.  And that advance has arrived—PGJ began powering ahead in mid-March, and even after a near-30% rally, it’s been unwilling to give up much ground during its recent consolidation.

Of course, there’s more to it than just charts.  China’s economy is slowing down (to “only” 7% or so GDP growth), but much of that has been priced in.  And more important, the authorities in that country are responding by opening the spigots—whether it’s loosening monetary policy or relaxing some economic restrictions, investors are getting the message that China is pushing harder for expansion.  It all adds up to higher stock prices.

Best of all, individual stocks have been lighting up the sky.  Importantly to us, stocks like Cheetah Mobile (CMCM), eHi Car Services (EHIC), JD.com (JD), Qunar (QUNR) and 58.com (WUBA) aren’t just super-strong, they all recently blasted out of multi-month IPO bases—in other words, like the overall Chinese market, these stocks (and many others) look like they’re just beginning major uptrends.

QUNR Stock Chart as of 5/20/2015 WUBA Stock Chart as of 5/20/2015

We’re writing this now because, after the decisive kick-off, most Chinese stocks have been quietly digesting their gains during the past three weeks.  This pause could easily go on a bit longer, but the nature of this consolidation (very little giveback after a large advance) is a strong sign that the next big move is up.  We think Chinese stocks as a whole, and many individual leaders, are nearing attractive entry points here.

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