Lombardi: Stock Market Commentary & Forecasts, Financial & Economic Analysis Since 1986

Why Chinese Stocks Are Taking Off All of a Sudden

Thursday, August 29th, 2013
By for Profit Confidential

Chinese stocksThe comparative advance in the Shanghai Composite Index may be subpar and well below the moves in the S&P 500 and Dow Jones Industrial Average, but that doesn’t mean you should ignore Chinese stocks. Recall a few weeks back when I discussed the upward moves in Chinese stocks. (Read “They’re Not Popular, But These Stocks May Offer Opportunity After All.”)

While there are the non-believers who feel that China and Chinese stocks are going down the toilet and that everything with the country was fabricated by the communist government, I simply say—good luck.

Just take a look at the price charts, and you’ll notice a somewhat resurgence in Chinese stocks, especially small-cap stocks, over the past weeks, with many advancing to new 52-week highs.

Now, I’m not saying you should welcome Chinese stocks into your portfolio with open arms, but there’s clearly an increased appetite for risk and bigger potential returns, versus the current flatness in U.S. stocks.

Take a look at China-based Qihoo 360 Technology Co. Ltd. (NYSE/QIHU), a developer of Internet and mobile security solutions to the Chinese market. You can think of Qihoo as the “Norton Antivirus” of China, and with 1.3 billion people, that’s a massive market opportunity. I recommended Qihoo in one of my past publications, and it has been a massive winner, up four-fold from its 52-week low of $20.01.

Based on my technical analysis, the chart of Qihoo below is a beautiful example of a stock in an uptrend. The stock also just recorded a bullish upside trading gap.

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QIHOO 360 Technology Co Ltd Chart

Chart courtesy of www.StockCharts.com

What I advise is not to just bypass Chinese stocks altogether. I still feel confident the country will remain one of the top growth markets in the world, especially as income levels rise and consumption increases to levels seen in the Western countries. This would help to drive China’s gross domestic product (GDP) and reduce the country’s current reliance on import demand from its trading partners.

A good example of the increased visibility of China as a bastion for consumer spending is the luxury stocks area. The rising wealth in China has driven major demand for high-end goods. This has helped to drive demand and revenues for the luxury stocks, such as Michael Kors Holdings Limited (NYSE/KORS), Coach, Inc. (NYSE/COH), and Tiffany & Co. (NYSE/TIF).

Tiffany reported strength in its second quarter, which the company attributed to its sales in China. Sales in China and the Asia Pacific surged 20% year-over-year, versus a surprising 11% for Europe, and a mere two percent in the United States. (Source: “Tiffany Reports Its Second Quarter Results,” BusinessWire, August 27, 2013.)

So while there will likely continue to be fraud by some Chinese companies, the situation is getting better due to the U.S. Security and Exchange Commission’s demands—and this means you shouldn’t ignore Chinese stocks.

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George Leong - Financial Planner, ConsultantGeorge Leong, B. Comm. is a Senior Editor at Lombardi Financial, and has been involved in analyzing the stock markets for two decades where he employs both fundamental and technical analysis. His overall market timing and trading knowledge is extensive in the areas of small-cap research and option trading. George is the editor of several of Lombardi’s popular financial newsletters, including The China Letter, Special Situations, and Obscene Profits, among others. He has written technical and fundamental columns for numerous stock market news web sites, and he is the author of Quick Wealth Options Strategy and Mastering 7 Proven Options Strategies. Prior to starting with Lombardi Financial, George was employed as a financial analyst with Globe Information Services. Add George Leong to your Google+ circles