Enter the Dragon Rally

 |  Includes: FXI, SPY
by: Hedge Fund Live

Now that the Santa Claus rally is over, perhaps we are now approaching the, wait for it, Dragon rally.

What the hell is a Dragon rally? If the month of December typically is a rally month in the U.S. due to performance chasing as well as psychological/behavioral market patterns, the same type of action might be observed with the approach of the end of the Lunar calendar in China (and other Asian countries that follow the Lunar calendar such as Taiwan and Singapore).

There are only a few articles/blogs that I found on this topic through a quick search. Observations are mixed actually on whether the rally occurs before or after the Lunar New Year. I took a look at the data from the past decade (since January 2000) and used the Shanghai Composite index to gauge the performance of the Chinese market while sticking to the S&P index, as usual, for U.S. market performance.

Below are the Shanghai and S&P average and median returns for the 10, 20, and 30 days leading up to and following the Lunar New Year:

Shanghai Lunar New Year Effect

Shanghai Lunar New Year Effect

The above data shows that on average the Shanghai Comp does rally into year end, according to the Lunar calendar, particularly in the 20 and 10 days leading up to the New Year. There is not a sell off following the New Year, however, the move does slow in the subsequent 10, 20, and 30 days.

S&P Lunar New Year Effect

S&P Lunar New Year Effect

The Shanghai index has been outperforming the S&P over the past decade around this January/February time period. In fact, the average returns in the S&P in the three time periods leading up to the Lunar New Year are all negative. Given this added context, the rally in the Shanghai in the days prior to the Lunar New Year is validated further, i.e., the strong returns are not just part of a wider global rally during these times of the year.

This end of year rally according to the Lunar calendar is what I am dubbing the Dragon rally. Yes, a little lame, but that’s what you get at Hedge Fund LIVE quite often. Anyway, in light of this rally that I am expecting in the Chinese market in the month or so leading up to their New Year, which falls on Febuary 3 next year, here are lists of strong Chinese stocks that have rallied this year along with the beaten up names.

Among the top performers are Spreadtrum Communications (NASDAQ:SPRD), Fuwei Films (NASDAQ:FFHL), 51job (NASDAQ:JOBS), Baidu.com (NASDAQ:BIDU) and Melco Crown Entertainment (NASDAQ:MPEL) (in descending YTD return order). The five worst performers this year are VisionChina (NASDAQ:VISN), Fuqi International (OTCPK:FUQI), Noah Education (NYSE:NED), Yucheng Technologies Limited (NASDAQ:YTEC), and Jinpan Intl Ltd (NASDAQ:JST) (in ascending YTD return order).

I would browse through the beaten up names more closely to select names that are still down, but don’t look too shitty to buy. Maybe Yingli Green Energy (NYSE:YGE), for instance, which is sitting on some good support levels on the daily. I’ll caveat by saying I do not know about the outlook for the solar names though.

Sutor Technology Group (SUTR) just had a breakout today in the basic materials space. A name that I know Tynik has traded several times, NetEase.com (NASDAQ:NTES), looks like it’s rounding up, although it faces resistance after today around the 200-day SMA. I don’t know the fundamental story here, but a breakout above the 200-day SMA will be a healthy sign for the stock and a lower risk buying opportunity.

Disclosure: No positions