U.S.-listed shares of Chinese companies have taken a beating in recent months, dropping to 52-week lows in reaction to that nation's slowing economy. American companies with China exposure have held up better but are now feeling the pressure, as evidenced by the latest warning from Dow component Caterpillar Inc. (CAT). None of this bodes well for the U.S. stock market in 2019.
Many American companies view China as their major growth market, but tariffs have dried up cross-investment, bringing cooperative business development to a screeching halt. The U.S. president believes that American business will take up slack with local production, but capital investment is showing no signs of ramping up in anticipation of greater local demand. This makes sense because capital spending plans take years to execute and even longer to pay off in profits.
Now add in the impact of rising yields, which is raising the cost of capital during the ninth year of an economic expansion. This negative factor alone may cancel out future profits despite higher local market share, making long-term investment in markets now dominated by China less feasible. All in all, it's a perfect prescription for a recessionary cycle that few economists anticipated at the start of 2018.
Baidu, Inc. (BIDU) shares broke out above the 2007 high near $40 in 2010 and took off in an uptrend that topped out at $166 in 2011. The stock rallied above resistance in 2014 and reversed above $250 a few months later, entering a steep correction that found support at $100 during August 2015's mini flash crash. Baidu stock completed a round trip into the prior high in September 2017 and reversed once again, dropping into a sideways pattern that broke to the downside two weeks ago.
This bearish action raises odds for a multi-year double top and downtrend that last several years. The search giant is now trading at a 15-month low, testing the apex of the triangle in place between 2015 and 2017. A bounce back to $220 should mark a low-risk short sale opportunity in this scenario, ahead of a decline into stronger support below $150. A China deal to end the tariffs would alter the technical outlook, but it isn't wise to bet on that outcome given rising tensions.
Alibaba Group Holding Limited (BABA) came public on the U.S. exchanges in the lower $90s in September 2014 and rallied to $120 two months later. It then entered a steep decline, dropping through the IPO opening print in a descent that ended in the upper $50s in the first quarter of 2015. The subsequent uptick finally reached the 2014 high in May 2017, generating an immediate breakout and uptrend that stalled above $200 in January 2018.
The stock posted a nominal new high in June and turned sharply lower in a steady downtick that broke 13-month range support in September. It is now settled at the top of the unfilled June 2017 gap between $127 and $133, raising the odds for a short-term bottom in the next week or two. The $160 level will mark steep resistance during a recovery effort, predicting that intermediate short sales taken in that vicinity will generate healthy profits.
The Bottom Line
U.S.-listed China stocks have entered bear markets, generating short sale opportunities while warning that U.S. companies with China exposure may follow suit in the coming months.
<Disclosure: The author held no positions in the aforementioned securities at the time of publication.>