In new bull markets, the leadership baton often gets passed to new stocks or sectors.
Many market participants make the mistake of focusing only on the prior cycle’s leaders. This tunnel vision impedes them from spotting new opportunities.
In China, a handful of stocks are breaking out of big bases. Long periods of basing action implies consolidation, and drying up of selling pressure. After going through such a severe bear market, a long period of basing is required to set the stage for a new bull market.
If we look at the old leaders or a sector exchange-traded fund (“ETF”) such as iShares MSCI China ETF (MCHI), they remain on steep downtrends, and have not put in solid bases yet.
For example, Tencent Holdings Limited (OTCPK:TCEHY, OTCPK:TCTZF) stock is still making lower highs and lower lows. The technical picture is not bullish.
Daily Chart: Tencent
Previous leader Alibaba Group Holding Limited (BABA) looks similarly weak, with the stock still in a deep downtrend.
Daily Chart: Alibaba
Same can be said for prior leader JD.com, Inc. (JD). The chart looks messy and unappealing.
Daily Chart: JD
By looking at the sector fund KraneShares CSI China Internet ETF (KWEB), it is easy to make the wrong assessment that the market is still taking time to base.
Daily Chart: KraneShares CSI China Internet ETF
As such, by having a narrow focus on prior leaders or the sector ETF, we can get the wrong impression that the sector is weak and needs more time to base.
However, digging deeper under the surface, we can actually find a new batch of stocks pushing higher out of big bases. These stocks are first out of the gates, and are likely to be the new batch of leaders.
Tencent Music Entertainment Group (TME) is one example – the stock has been stealthily building a big multi month base, and broke out from it in November on high volume. This tells me that institutional money is flowing into the stock. On Wednesday, the stock broke out quickly from a tight consolidative range, hardly giving market participants an opportunity to hop on.
Daily Chart: Tencent Music
Pinduoduo Inc. (PDD) is potentially another big leader. Similar to TME, the stock has broken forcefully out of a big multi-month base.
Daily Chart: Pinduoduo
Melco Resorts & Entertainment Limited (MLCO) is a casino stock that broke out of a big multi-month base on high volume. Stock is seeing huge upside momentum, rising as much as +160% in less than 2 months.
Daily Chart: MLCO
To conclude, a handful of China stocks are stealthily making the right moves. These moves are probably not noticed by the majority of market participants, who make the mistake of focusing on the indices, sector ETFs, or prior cycle leaders.
Editor’s Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.
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