Alibaba (BABA) and Baidu (BIDU): Once Bitten but Going Back for More


For traders, there is no such thing as “once bitten, twice shy.” It’s not that they don’t learn from their mistakes, it’s just that a losing trade is simply part of the job. Successful traders are, by definition, disciplined enough to take a small loss and move on to the next trade when that happens. So, despite being “once bitten,” the fact that a trade has failed in the past doesn’t mean a trader won’t go back to the same thing at another time, even if circumstances and setup say they should.

I mention this because on September 1 of last year, I wrote a piece explaining why I intended to buy both Alibaba (BABA) and Baidu (BIDU) that morning. Neither of those trades worked out. Both hit their stops a couple of weeks later, and each resulted in losses of around 4%. I know that I’m risking feeding the trolls by pointing out an occasion when I wrote about a losing trade. But I feel I should mention it because I plan to repeat that trade, albeit in different circumstances and at different levels, this morning.

The logic then was that what was driving the stocks lower, an apparent change of heart from the Chinese government, was both understandable in the context of the Communist Party’s ideology and motivation, and following the same logic, destined to be finite. That wasn’t wrong, but other factors delayed a recovery in Chinese internet stocks. Rising inflation and the resulting anticipation of rate hikes made “risky” plays like Chinese tech less attractive, and every small blip up was met by selling.

That fear about rates, however, now looks like much more of an American thing than a global thing. Last night, the People’s Bank of China (PBC) announced a ten basis point cut in their benchmark interest rate, the second straight month of rate cuts. The PBC’s American counterpart, the Fed, on the other hand, still projects rate hikes this year. So, if higher rates are what is causing trepidation and the PBC is moving in the opposite direction, it makes sense to buy Chinese stocks that have dropped along with U.S. tech over the last couple of weeks.

As you might expect, both stocks popped this morning on the overnight news, but both have pulled back from their early morning highs. That gives a decent entry point in each case, while also suggesting a fairly close, logical level off which to set a stop.

For BABA, that means buying in the 133s, with a stop set just below the low of a couple of days ago, at around 123.50.

baba

For BIDU, the same basic strategy implies an entry point of around 162 and a stop-loss level just below 150.

bidu

The trade isn’t perfect, of course, but then again, no trade is. The risk is that the conservative, authoritarian wing of the Party gains more power in China should the economic impact of the latest Covid surge prove to be serious, and BABA, BIDU, et al are made the scapegoats. If that happens, then confidence in Chinese equities in general will be severely damaged, and the stops will be hit quickly.


That, however, is why the trade needs stops and the discipline to stick to them. If the stop-loss levels are hit for that or any other reason, losses will still be manageable, and once again, the loss would be unfortunate, but not a mistake. It certainly would not be a reason not to buy these stocks again if there is another logical setup in the future because even “twice bitten” shouldn’t make a trader shy.

Do you want more Articles and analysis like this? If you are familiar with Martin’s work, you will know that he brings a unique perspective to markets and actionable ideas based on that perspective. In addition to writing here, Martin also writes a free newsletter with in-depth analysis and trade ideas focused on just one, long-time underperforming sector that is bouncing fast. To find out more and sign up for the free newsletter, just click here

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.



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