A Speculative Bet on the Chinese Stock Mania

Nicholas Vardy

Nicholas Vardy has a unique background that has proven his knack for making money in different markets around the world.

Stock markets rebounded strongly last week with the Dow Jones up 1.66%, the S&P 500 gaining 1.70% and the NASDAQ jumping 2.23%. The MCSI Emerging Markets Index soared 3.98%, breaking out to a six-month high.

Big gainers in your Bull Market Alert portfolio included the ProShares Ultra Nasdaq Biotechnology ETF (BIB), which jumped 10.57%, Halyard Health Inc. (HYH), which climbed 2.81%, Integrated Device Technology (IDTI), which gained 2.58%, the WisdomTree Japan Hedged Equity Fund (DXJ), which added 2.44%, and Ambarella Inc. (AMBA), which rose 2.43%.

MasterCard (MA) moved back above its 50-day moving average to become a BUY.

Halyard Health Inc. (HYH) also hit a new 52-week high.

You were stopped out of the iPath S&P 500 VIX ST Futures ETN (VXX) at a loss.

I’ll also be keeping a close eye on when to exit Bank of Ireland (IREBY) as it stops trading on April 22.

This week’s Bull Market Alert recommendation takes you to Hong Kong, where the stock market has seen a massive rally in the past week.

The Hong Kong market is surging and has rallied 15% just since March 11, hitting a seven-year high on Wednesday.

Here’s why I expect this rally to continue.

First, the launch of a trading link between mainland Chinese and Hong Kong stock markets has allowed Chinese mutual funds to invest in Hong Kong shares. Mainland investors have so far spent just over half their quota to invest in Hong Kong stocks through the city’s Shanghai exchange link. The market also sees this as a sign of the Chinese government’s future efforts to boost the Hong Kong stock market to attract foreign capital for future initial public offerings (IPOs). So there may be more to come.

Second, Hong Kong stocks are cheap compared to mainland Chinese A-shares. Average price-earnings multiples are below 12 in Hong Kong. That’s just a quarter of the value of stocks listed in the mainland city Shenzhen, where A-shares are traded and about 30% below stocks traded in Shanghai.

Here’s a word of warning. The mainland Chinese stock markets are clearly in the midst of financial mania. Local investors are taking second mortgages to invest in the stock market. This will clearly end in tears.

That said, investing in mania with the objective of getting in and out quickly with short-term profits is still a viable trading strategy. And the current discount of the Hong Kong market compared to the mainland ensures that the Hong Kong rally has more to go.

So buy the iShares MSCI Hong Kong (EWH) at market today, and place your stop at $20.50. After last week’s breakout to the upside, the related options are overvalued. So I will hold off on recommending those until the market settles.

Portfolio Update

Halyard Health Inc. (HYH) added 2.81%. HYH also hit a new all-time high last week. HYH continues to make gains as a provider of advanced medical technology and due to the broader rally in the healthcare sector. HYH remains a BUY.

MasterCard (MA) rose 1.77%. Twenty new financial institutions recently announced that they are now live on Apple Pay, allowing even more MasterCard holders to use this growing electronic payment method. MasterCard also has released a new app called MasterCard Nearby that allows users to find nearby merchants accepting the contactless payment solution. MA will report earnings on April 29 before markets open. MA also rose above its 50-day moving average (MA) last week to become a BUY.

Ambarella Inc. (AMBA) gained 2.43% in the past five trading days. Ambarella has an agreement to supply high-end camera components to the large China-based smartphone maker Xiaomi Inc. Pacific Crest analysts say this deal adds “material upside” to AMBA — words that every investor loves to hear. Pacific Crest has an “Outperform” rating on AMBA. AMBA is a BUY.

ProShares Ultra Nasdaq Biotechnology ETF (BIB) jumped 10.57%. The recent correction in biotech has generated several buy signals on BIB’s chart. The recent double-bounce from BIB’s 50-day MA, a dip in its stochastic indicator, combined with biotech’s continuing strength all suggests that this is an excellent buy point for BIB. BIB is a BUY.

Integrated Device Technology (IDTI) gained 2.58% for its first week in your portfolio. This play on the “Internet of Everything” is poised to reap future gains as the breakneck pace of this technological megatrend accelerates. Topeka Capital initiated coverage on IDTI last week, setting a “Buy” rating and a $24 price target — a potential 18.46% upside from Friday’s close. IDTI is a BUY.

Newly Updated Special Report

As a courtesy, I invite you to view the newly updated version of The Top 12 Stocks for 2015, which features three of my top investment recommendations from the recent Orlando MoneyShow, as well as bonus picks from each of my fellow investment newsletter editors at Eagle. This report and others are available FREE on my website to you.

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Nicholas Vardy

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