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Chart Advisor: Following Separate Paths

Posted November 19, 2021 at 2:40 am
Gordon Scott

Thursday, 18th November, 2021

1/ Chinese market divergence isn’t deterring U.S. stocks 

2/ Alibaba falls short of expectations

3Can NIU impress investors? 

4/ The bottom line

1/ Chinese Market Divergence isn’t Deterring U.S. Stocks 

U.S. markets edged higher today, underscoring an interesting comparison that has become apparent over the past 12 months. The chart below compares the performance of State Street’s S&P 500 Index ETF (SPY) with iShares’ China Large-Cap ETF (FXI) over the last 12 months.  

While SPY has continued rising, Chinese equities have been falling. Generally, if the Chinese market is doing poorly, it can often be an early indicator that trouble is brewing for the U.S. markets. So far this year it seems that the opposite has been true. 

The leaders of the two countries, President Biden and China’s President Xi Jinping recently held a virtual summit which produced no breakthrough steps to better relations. Both sides reiterated points of longstanding contention, merely agreeing on the need to prevent competition from escalating into broader conflict.  

SPY and FXI have been on opposite paths over the last year, with each market’s relationship with big tech companies shaping the difference. Mega-cap tech companies have been largely responsible for driving new highs in U.S. markets, while Beijing’s crackdown on big tech has hampered FXI, as investors have sought out safer havens.  

A potential default of China developer Evergrande bled into domestic markets for a time, but merely served as a small pullback on a continued uptrend. FXI’s recent lows are mirrored by SPY’s levels of November 2020, and SPY appears poised to break the February highs of FXI soon. 

Chinese markets could stage a turnaround but are still struggling with the same issues domestic markets face, namely inflation and supply chain disruptions. The flip side of the conversation is SPY closing the gap with FXI with a prolonged downward trend, which could be possible once the Federal Reserve changes their relatively dovish economic policy toward inflation.  

2/ Alibaba Falls Short of Expectations 

Shares of Alibaba (BABA) plunged after the company reported weaker-than-expected earnings for the fiscal second quarter. Analysts expected BABA to announce $12.11 in earnings per share (EPS) along with $205.7 billion in revenue. BABA greatly missed expectations, reporting $11.20 in EPS and $200.7 billion in revenue.  

BABA’s earnings decline was the first out of any quarter in the last four years. Slowing economic growth in China compounded regulatory headwinds the company faces amid Beijing’s crackdown on big tech. The earnings-based drop has BABA shares trading in an extreme low range, well below its 20-day moving average, as per the chart below.  

Prior to earnings, it appeared option traders were positioned for the stock to move higher after earnings. That’s because the open interest for BABA featured nearly 2.6 million call options compared to 1.9 million puts. However, it should be noted that implied volatility for call options prior to earnings was falling, which could mean that option traders were taking advantage of elevated premiums to sell calls, while buying puts.  

After earnings, options are priced to move lower, as puts are more expensive than calls after accounting for intrinsic value. 

3/ Can NIU Impress Investors?

Investors have been selling off shares of Niu Technologies (NIU) ahead of the company’s third quarter earnings announcement, which is expected Monday before the market opens. Wall Street is forecasting $1.79 in EPS and $1.39 billion in revenue. EV stocks took off last year but have had mixed results since then. Investors will be watchful to see how NIU has been able to expand their market of electric scooters. 

The chart below compares the recent performance of NIU with iShares’ China Large-Cap ETF (FXI). While today’s 5% share price decrease could be seen as a side effect of BABA’s poor earnings, NIU shares have been on a relative downward trend since the beginning of the month. It’s been tough sledding for both NIU and FXI in 2021, as the stocks are down 16% and 13%, respectively, year-to-date.  

It will be interesting to see how NIU is able to navigate being in a hot sector while also being a stock from China. Investors haven’t felt the need to buy up Chinese stocks right now.   

4/ The Bottom Line 

U.S. stocks pushed higher today even as Chinese stocks were weighed down by Alibaba’s report. The company missed analysts’ expectations, and the resulting price drop had a ripple effect on all Chinese stocks. This may also impact investor response to NIU Technologies’ upcoming earnings report. 

Originally posted on 18th November, 2021

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