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China’s crackdown on several industries has demolished Chinese stocks listed in the U.S. Everybody’s panicking about the stuff I’ve been warning about when it comes to investing in China, a communist regime — the random enforcement of laws, corruption, a lack of transparency and so on.
And when I say everybody, I mean everybody. And if the person has an opinion about Chinese stocks, it’s going to be that you should sell them and run for the hills.
As the collapse of these stocks has accelerated, there are margin calls, and that forced liquidation is working its way through the markets Tuesday in not only Chinese stocks but also in some U.S. stocks. The crappiest of the small-cap tech stocks that I’ve long warned about are crashing.
Contrarian bet
I’m going to make a contrarian bet amid this forced sell-off action in Chinese stocks by nibbling a little bit of Tencent
TCEHY,
and the iShares MSCI China ETF
MCHI,
for a shorter-term trade. And I’m buying back a little of the JD.com
JD,
that we’d sold at higher levels during the past few months. Be careful out there, as always, because if Chinese stocks keep tumbling, the action from those names could accelerate in their impact on U.S. markets.
One of the big tells that the market has turned from Blow-Off Top phase to being somewhere on the other side of the Bubble-Blowing Bull Market for most stocks is how they react to news of new money raises. In January and February and into March of this year, whenever a company would make an announcement declaring that they were selling securities to raise money for the balance sheet to invest in their businesses, the stocks would rally on the news.
That’s not the case anymore, as Virgin Galactic
SPCE,
and many others that have raised money have seen their stocks collapse on the news. The reaction is reflective of the continued decline in thousands of small-cap stocks, most of which are down 70% or more from their highs earlier this year.
IPO zombies
Meanwhile, I want to keep reminding you that there are literally hundreds of stocks that have come public in the last year or two that will go to zero. Some will be fraudulent. Some will suffer from bad luck and just fail.
Doesn’t matter why — they’ll cost people billions in coming months and years. There’s a lot of trash in the markets. I took the picture, below, when I was describing how I think there’s a lot of “trash” in the stock markets and in the crypto exchanges while on a road trip to White Sands in New Mexico last weekend and happened to look out the window at the train going by with graffiti on it:
Earnings as an indicator
Meanwhile, we’ve entered earnings season, and the reaction to Tesla’s
TSLA,
report Monday will either turn out to be an outlier or a harbinger of what’s to come for most tech stocks.
The report, released after the market closed Monday, was fine, even stronger than expected. While the commentary from CEO Elon Musk — who said he won’t be on most Tesla earnings calls from now on and which I think is probably fine because he has plenty of other outlets through which to communicate with us — was focused on supply chain problems delaying the company from me getting a Cybertruck by the end of this year, maybe that’s what the market doesn’t like.
Or maybe, like with the action of the stocks from companies that raise money that I mentioned above, the drop in Tesla’s stock is more indicative of a broader market pullback than it is of Tesla’s earnings report itself.
We won’t have to wait long to find out which it is, as Apple
AAPL,
Microsoft
MSFT,
and hundreds of other companies report earnings this week.
In the hedge fund, I’ve still got a lot of short hedges and plenty of puts on the sheets but I am, as you might expect, covering part of the shorts and selling a few of the puts into panicky action Tuesday.
Other than the aforementioned nibbles, I’m sitting tight in the personal account, as has been the case most of the time lately. I do see some bargains beginning to develop as the broad-based collapse — can we call a 70% drop over a four-month period for thousands of small-cap tech stocks a “crash”? Yes, I think we can — has accelerated lately.
Stay tuned. I do think we’ll have some new names to buy. I will send out Trade Alerts in coming days and weeks. No rush, as always.
We can patiently sift through the rubble (even as I plan to remain short many of the crappiest small-cap tech stocks for a while longer, at least). Don’t let FOMO, MOMO, YOLO, Blow-Off Top Phases, Sector Crashes or anything else distract you from the mission of building wealth while minimizing risks over many years.
Cody Willard is a columnist for MarketWatch and editor of the Revolution Investing newsletter. Willard or his investment firm may own, or plan to own, securities mentioned in this column.
