Index Watching Can Be Harmful - Long Alibaba
I find myself more and more often overlooking the performance of the major indices and having a greater concentration on individual stocks and sectors. Like counting cards in a casino, the real advantage over the house is knowing when the deck is “hot”. Knowing when the deck is hot is the time to place bigger bets and reducing them when it cools. In the stock market I have individual stocks I am long and/or short and depending on the index behavior and seasonality, will depend on whether I allocate a small amount of capital or go “all in”.
Using the major indices as the only means to be long or short, will mean missing out on a significant amount of opportunities. Let’s take the S&P 500 for example. The index is literally still trading at the same levels it was eight weeks ago. So anyone using the index as a sole ground for being long or short or only trading the index will have missed out on great opportunities at the stock level.
The index can often mask what is going on behind the scenes.
Naturally if the index looks set for a serious correction, it would be wise to lighten up. And that’s part of using the index as a barometer for weighting your investments.
Now let’s look at currently my largest exposure in the US which is in Alibaba (BABA). Long-term readers will know of my approach to riding trends. A quick recap. I use the 10, 21 and 30 exponential moving averages. Relatively short-term holds I will focus on daily timeframes and longer-term exposures I may choose to use weekly timeframes.
Provided the trend is strong and consistent, pullbacks should find support somewhere between the 21 and 30 period moving averages. While that remains the case, dips towards those averages can be bought, it is where support lies and further gains can be looked for. The chart below of Alibaba shows that while the S&P 500 has made no ground, it has been able to make new highs and importantly hold its moving averages that have acted as support. There are countless other stocks that can be included in the same group that have done well.
I seriously like Alibaba as a medium-term trade given that we have historically seen ‘selling platforms’ like Amazon outperform the manufacturers of products being sold on those platforms. The same I can see happening for Alibaba. Furthermore, as the Chinese middle class grows, the natural customer base and their spending power also grows. Recent People’s Bank of China data has showed an uplift in business expectation and sentiment and also an increase in funding to consumers. Some of these data points have reached the highest levels in 5 years.
When we look at Alibaba chart structure, it is within sight of its record high that was set shortly after listing back in 2014. It took Facebook (below) a similar amount of time to also break through to fresh new highs but when it did, it hasn’t looked back. I was long Facebook then and see similarities in Alibaba today. The latest result from Alibaba kick started the breakout through $95, much like Facebook’s quarterly result in 2013 that convinced the market they could make money from their mobile platform triggered a huge re-rating. Alibaba could still reach levels towards $200 in 2017.
Greg is the Head of Proprietary Trading at Global Prime and has over 20 years of experience as proprietary trader and high level strategist for the major investment banks including Citigroup, Bankers Trust and Macquarie Bank. He has been involved across all asset classes including commodities, bonds, currencies and equities right across the globe.
After a 10-year career within the comforts of the large investment banks and research firms he branched out on his own to form his own proprietary trading firm successfully building the business into a multi-million dollar trading operation that turned over a billion dollars a year. This same team now runs the proprietary trading desk at Global Prime, risking their own money in line with the firm's and client's capital.
Greg has appeared on CNBC, Channel 9 - Business Sunday programme, a guest columnist for the Australian Financial Review, a regular author for Personal Investor, Wealth Creator and Shares magazine and is the former Treasurer of the Australian Technical Analysts Association.