From the desk of Steve Strazza @Sstrazza
Thanks to everyone for participating in this Week's Mystery Chart. Most of you were sellers but the chart was inverted, so you were actually buyers.
We'd be buying this chart too, so let's dive right in and see what it is and why we're all so bullish.
This week's chart was the Invesco Chinese Technology ETF $CQQQ.
In this post, we'll dig into the strongest Chinese technology stocks and outline some trade ideas as a way to express our bullish thesis.
We'll also discuss some intermarket implications of this ETF and its components.
We're going to take a close look at these Chinese tech giants and see if we can glean some insight into the internals of CQQQ in addition to other International Indexes.
First of all, the chart looks a good deal different than it did when we posted the Mystery Chart earlier this week.
This isn't just because it was inverted, but also because the ETF has made a swift move this week, booking about an 8% gain.
Click Chart to Enlarge Image.
Look at this beautiful uptrend. The ETF tends to consolidate for several years and then make another leg higher. This summer it resolved to the upside from its most recent consolidation (once again). It then flagged above former resistance turned support for a couple months before breaking higher in the direction of the underlying trend just this week.
Now let's take a look at how Chinese Technology stocks are performing relative to stocks around the globe. Here is a ratio chart of CQQQ vs the All Country World Index $ACWI.
It just broke out of a 3-year base to fresh all-time highs. As long as this breakout holds, we expect this ratio to have some serious legs. In other words, Chinese Tech should continue to outperform the broader market for the foreseeable future.
As you can see, they have already been outperforming for over a year after bouncing off a key support level at prior lows. For that reason, this has been a group we've been leaning on to express our bullish thesis on stocks all year. We see little reason for this trend to reverse any time soon so will continue to look for opportunities in the space.
You can read some of our past posts about Chinese Tech stocks here, and here.
If there's one thing I've learned about relative trends, it's that once established, they often remain in place for much longer than one would think.
Just look at the US vs World. The US has been outperforming by a wide margin for over a decade now. An even better example is Growth over Value. This relative trend has been in place for about 15-years now. Contrast this with Chinese Tech now, which has only been outperforming for about a year...
So, what stocks are driving this relative strength? Here is a list of the top 20 holdings that comprise the Chinese Technology ETF (data from Bloomberg):
A lot of the top holdings in CQQQ are also some of the largest weightings in China Country ETFs such as $FXI as well as Emerging Markets $EEM and the BRIC Country Index $BKE.
The two largest holdings, Meituan and Tencent, are also the two largest holdings in FXI and make up about 20% of both ETFs. They are also 2 of the top 5 holdings in EEM with a combined weighting of about 10%.
Chinese Tech stocks have become so large that they don't just do the heavy lifting for China these days but also drive the performance of many key diversified international indexes. Due to this significant overlap, watching CQQQ can provide us valuable information and insight into these other areas.
Interestingly enough, both the BRICs and Emerging Markets are attempting to break out of decade long bases.
Whether or not these bases resolve to the upside is going to have a lot to do with their largest components so let's take a look under the hood and see what they're telling us.
First, we have Meituan $MPNGF which along with Tencent comprises about 10% of CQQQ.
Not only is the stock in a very strong uptrend but it is also exhibiting impressive relative strength against the Chinese Technology ETF itself. This means that one of the ETFs largest holdings is also one of its top performers.
Considering the importance of Meituan due to its heavy weighting, this bodes well for the index. As we like to say, "the trend is your friend" - and the uptrend in Meituan has been a very good friend to CQQQ these days.
Here is Autohome $ATHM.
While this one is also not actionable at current levels, it's definitely a chart we'd rather be buying than selling.
After rallying about 5x off its 2016 lows, Autohome has been building out a big base for the past 2.5 years. With price pressing back towards its 2018 record highs, we'd anticipate this to eventually resolve higher in line with its primary uptrend.
Now for some actionable setups...
