Chinese Stocks Showing Relative Strength

The market is trapped in a fear vortex due to an unusual combination of events. These include sky-high levels of bullish sentiment in the early parts of the year, a slowing manufacturing economy, the coronavirus outbreak, and so far an underwhelming response from U.S. authorities. Despite these challenges, there are some positive developments in the market, and they should be noted. When stocks do bottom as long as this relative strength persists, these groups will likely lead to the upside.

Some parts of the market showing relative strength are commodities like copper, housing-related sectors, and Chinese stocks. This article will focus on Chinese stocks. Ironically, China was the first and hardest-hit country from the coronavirus. It took some extreme measures to contain the virus, but they have proved successful in preventing its spread. Case counts have been steadily declining since late-January.

China's Success

New cases peaked around 3,000 to 4,000 per day in the last week of January and currently is under 1,000 new cases per day. The trend is encouraging. It's a stark contrast to the U.S., where tests are just becoming available on a nation-wide basis and show that some economic pain may be necessary to overcome the coronavirus. It's also not surprising that the Chinese stock market bottomed in late-January. Since then, while global markets have been moving lower, the Chinese market remains range-bound.

For example, the iShares China Large Cap ETF (NYSE: FXI) is basically flat since January 27. In contrast, the S&P 500 (NYSE: SPY) is down 10% over the same period. In China, the government has pumped extraordinary amounts of fiscal and monetary stimulus to combat the decline in economic activity. Due to its success in containing the virus, the country is returning back to normal. Factories are coming back online, schools are reopening, and traffic is returning to normal levels.

Some Candidates

The relative strength in Chinese stocks is quite simple. The country's on the path to normalization, and authorities are stepping up with appropriate stimulus. Two areas to focus on are the eCommerce companies like Alibaba (NYSE: BABA) or JD.com (NYSE: JD), and the online education companies like TAL Group (NYSE: TAL) or GSX Techedu (NYSE: GSX). It makes sense that the temporary, shutdown in China would further accelerate the shift to online shopping and online education.

And this hunch is confirmed by the price action in these stocks. They are off their highs by less than 10%. While nearly 95% of stocks have been under distribution the past couple of weeks, these stocks have been trading in a relatively tight range. This is a sign of accumulation that bodes well for their prospects when stocks do bottom.