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Bulls refusing to leave the China shop

By: optionMONSTER
Posted: 4/5/2011 8:25:00 AM
Referenced Stocks: BIDU;CTRP;FXI;SINA;SOHU

Chinese stocks continued to outperform yesterday and may portend a broader sentiment shift that could last weeks or even months into the future.

optionMONSTER's Heat Seeker tracking system detected a surge of bullish activity in names such as, Sohu, and Sina, which ripped to new all-time highs. Most of the attention focused on companies in the Internet and e-commerce sectors.

BIDU, as usual, was the most active stock, followed by SINA. Both traded about twice as many contracts as average amid heavy call volume and put selling, which reflects a belief that downside is limited and more gains are likely.

SOHU stood out relative to its normal activity, with more than 21,000 contracts trading compared with 3,623 in a typical session. Calls outnumbered puts by about 5 to 1 as new money flowed into the April 100s and the April 110s. The stock ended the session up 7.06 percent to $97.30.

SOHU and SINA are web-portal businesses similar to Yahoo or AOL, offering a mix of media and services, while BIDU is a search engine like Google.

Another stock that caught attention was online travel agency International, which has soared 13 percent in the last two weeks. Melco Crown Entertainment, an operator of casinos in Macau, also surged amid a wave of call buying.

The iShares FTSE/China 25 Index ( FXI ), which tracks Chinese equities, rose another 1.89 percent to $46.35 yesterday and is up 11 percent in the last two weeks. It's outperformed most other emerging markets and delivered almost triple the return of the S&P 500 over that period.

Most of the options activity in the fund, however, was bearish because investors tend to use it as a hedging instrument.

The recent enthusiasm follows about a year of weakness, during which investors worried about rising inflationary pressures. As optionMONSTER anticipated in early March, those concerns are now easing and developing countries' long-term secular bullish trends appear to be resuming.

One noteworthy exception to the optimism in Chinese stocks was the solar sector, which continued to struggle yesterday. See this recent article for more on the problems facing that industry.