Here's Why We're Buying Chinese Internet Stocks

With the Chinese Internet Index closing at new 7-month highs this week, have we seen the move already, or are we just getting started?

One thing we know for sure by studying history is that stock prices trend. That's why Technical Analysis works. These tools help us identify those trends. Many academics will tell you that these consistent series of higher highs and higher lows over time are just random. The truth is you can show these charts to a 5 year old and the kid will tell you that yes, this stock is going up, or no this stock is going down. You can even argue that a trend is sideways, but that is trend recognition nonetheless.

It's very clear that markets trend, particularly stocks. They go up over time and they go down over time. A stock making new highs has a higher likelihood of continuing to make new highs vs turning around and beginning a new trend. An object in motion tends to stay in motion, is how Newton taught us. It's the same in stocks, which are driven by e-motion. (See what I did there?)

With Chinese Internet holding above key levels, I think the path of least resistance is over 10% higher for the Index. If $KWEB is above 49, I like this group of stocks, higher:

Here is the Internet Index compared to the more traditional $FXI China Large-cap Index. If these Internet stocks keep doing well, China as a group is likely to do the same. That's a big piece of the bullish Emerging Market story that we've been talking about all year:

I think if $KWEB is below 49, that is most likely happening in an environment where the US Dollar is rallying and stocks are falling. Based on the weight-of-the-evidence, this is the lower probability outcome in my opinion. I'm still in the camp that the US Dollar weakens and Emerging Markets and other Dollar sensitive assets do well.

Let me know what you think