Why Are Chinese Stocks So Hot Right Now?

I have written many times in many Cabot Wealth Advisories that the market wants to take your money. And that’s the literal truth; I’m not backing off that one inch.

But what’s also true is that, every once in a while, the market loves to surprise the heck out of you in very delightful ways. And we’re right in the middle of one such episode.

I’ll let the chart do most of the talking, but here’s the setup. The asset being charted is an ETF that tracks the performance of Chinese stocks that trade on U.S. exchanges as American Depositary Receipts (ADRs). It has a long name—PowerShares Golden Dragon Halter USX China (symbol PGJ)—but we just call it Golden Dragon.

If you look at a long-term chart for the Golden Dragon, you’d see that it hadn’t made any progress since October 2013. Yes, there have been four significant rallies and three similarly weighty corrections since then. But for that period of almost two and a half years, the net progress has been pretty much nothing.

Until now.

Here’s the chart.

The word that growth investors use to describe rallies like the one the Golden Dragon has been in since March 16 is “blastoff.” And there aren’t many situations where it fits more. Without any real preparation or warning, the ETF just took off vertically and kept going.

And why has this remarkable rally taken place? I don’t really know. I didn’t see it coming and I can’t give you chapter and verse about who the buyers are and why they have come to life now.

I know that the long, long period of sideways trading in Chinese stocks has built a powerful base for a rally. And I know that the recent spate of bad news about the Chinese economy has likely squeezed out the last of the Chinese investors who weren’t totally committed to staying invested there. After all, the moment of greatest discouragement and despair is the moment the next rally begins.

But the important thing about any rally isn’t why it’s happening. It’s what to do while it’s happening. And I have a couple of ideas about that.

Cabot China & Emerging Markets Report, which I write, has been doing quite well in recent months. But that’s because of good stock picking, not because the market has been doing well. But with a market that’s as hot as China is now, you can take your pick of metaphors: The wind is at our back. We’re on a downhill straight and we’re picking up speed. The stars have lined up in our favor.

How should you react? Well, I don’t advise selling all your other stocks and jumping into Chinese ADRs with both feet. After all, something that’s streaking higher can also streak lower.

But the portfolio of Cabot China & Emerging Markets Report was properly positioned when the rally ignited, and it has done wonders for our portfolio. We had a significant exposure to strong Chinese stocks, plus a cash reserve that we maintained because the market was doing more sideways trading than heading for the sky.

And since the rally began, we’ve been steadily ramping up our exposure to the strongest Chinese stocks. That’s what you do in a rally.

My message to you is that a subscription to Cabot China & Emerging Markets Report can show you the opportunities in all emerging markets and tell you how to play them.


In this week’s Stock Market Video, Mike Cintolo discusses some encouraging action in the stock market this week. The major indexes held support early in the week (despite disappointing jobs data) and the broad market strengthened, including some energetic buying among glamour stocks. Mike is still holding some cash and being choosy about buying, but should the market do the unexpected and kick itself up and out of its trading range, he thinks it could lead to a sustained uptrend, especially for growth stocks. Click below to watch the video.


Here’s this week’s Fortune Cookie. Remember, you can always view all previous Fortune Cookies here and Contrary Opinion buttons here.

Tim’s Comment: Talk about a softball! This quote is so relevant to investing that it needs no explanation! In fact, this quote is probably on the walls of many full service stockbrokers, who hope it gets clients to invest more of their money earlier. And I assume it works.

Paul’s Comment: It’s easy to regret not having started something a long time ago. And it’s even easier to let that regret keep you from starting now. People who look at the stock market after a rally can feel like they missed their chance and another one will never come along. Hogwash! The market is about new chances every day; you just need the resolve to get started. Yesterday and tomorrow are very difficult times to get things done. Right now is the best time.


In case you didn’t get a chance to read all the issues of Cabot Wealth Advisory this week and want to catch up on any investing and stock tips you might have missed, there are links below to each issue.

Cabot Wealth Advisory 4/6/15 — Progress Happens

Cabot Stock of the Month’s Chief Analyst, Tim Lutts, looks back at a 2012 piece he wrote called “Eight Stupid Rules That Are a Drag on the U.S. Economy,” and notes that real progress has been made on some of them. Stock discussed: Palo Alto Networks (PANW).

Cabot Wealth Advisory 4/7/15 — An Easy Way to Double Your Yield

Chloe Lutts Jensen, the strategist behind Cabot Dividend Investor, writes in this issue about how using options—like covered calls—can increase the amount of income your stocks produce with very little risk. Option discussed: Walmart (WMT).

Cabot Wealth Advisory 4/9/15 — Helpful Investing Maxims

Growth investing specialist Mike Cintolo, chief analyst of Cabot Market Letter, talks about how to actually put into practice the rules everyone has heard so often. Mike’s advice is specific, right down to the percentages, as well as telling you why following the rules is so important. Stock discussed: Ctrip.com (CTRP).

Have a great weekend,

Paul Goodwin
Chief Analyst, Cabot China & Emerging Markets Report
And Editor of Cabot Wealth Advisory

Paul Goodwin can be found on Google Plus.

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