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Are Chinese Tech Stocks and $CWEB Set to Soar in the Short Run?

October 27, 2021

Editor’s note: Any and all references to timeframes longer than one trading day are for purposes of market context only, and not recommendations of any holding timeframe. Daily rebalancing ETFs are not meant to be held unmonitored for long periods. If you don’t have the resources, time or inclination to constantly monitor and manage your positions, leveraged ETFs are not for you.

Amid recent scrutiny towards its technology and media companies from the Chinese government, US listed Chinese stocks have begun to bounce back from a prolonged selloff that bottomed in early October. 

Sentiment has improved as Chinese President Xi Jinping recently pledged to support efforts to increase technological innovation, accelerate development of smart infrastructure and further the country’s research capabilities – all of which may prove a boon to China’s tech industry.

Evergrande Crisis’s Impact on Chinese Stocks: Regulators Say Crisis Contained

Chinese banking regulators have sought to temper the notion that the China Evergrande Group crisis [see previous Xchange post] would have a broader impact on the credibility of the nation’s property market citing it as an “individual” case

Traders Load Up on Chinese Stocks

Traders in Hong Kong have bought into what they see as bargain prices in Chinese tech stocks, betting that the worst is over and driving a significant rally in the Hang Seng China Enterprises Index +9.67% as measured 10/6 to 11/16.

Amid the drawn-out selloff, the largest ETF tracking the CSI Overseas China Internet Index, has seen short interest dip to lows not seen since 2018, while inflows to the Chinese fund have sent assets soaring above $8 billion.

Source: Bloomberg. Past performance is not indicative of future results. Current market cap of the largest ETF tracking the CSI China Internet Inex has soared above $8 billion (as of 10/21/21). A change in market cap does not represent performance returns.  The Direxion Daily CSI China Internet Index Bull 2X Shares (CWEB) seeks daily investment results, before fees and expenses, of 200% of the performance of the same index (CSI Overseas China Internet Index).

Source: Bloomberg. The short-interest ratio is the number of shares sold short (short interest) divided by average daily volume. This is often called the "days-to-cover ratio" because it determines, based on the stock's average trading volume, how many days it will take short sellers to cover their positions if positive news about the related security lifts the price

Chinese Tech Stocks: Technically Speaking, Here’s the Short-term Trade Idea

The CSI Overseas China Internet Index, price performance is currently presenting a potential bullish Inverse Head & Shoulder Pattern*, shown below. Based on technicals, the index may face some resistance as it gets to the 8000 level which is around the “neckline” of the pattern. Should it breach that level, technical traders may see further room to run in the short term.

If not overtly positioning for a near-term bounce, it is clear that traders are expecting calmer seas ahead in Chinese tech stocks. As with any short-term event it’s never a sure thing. There are still factors that may change this course on a daily basis.

YTD CSI Overseas China Internet Index chart from 1/1/2021 to 10/1/2021 showing possible head and shoulder pattern.

Past performance is not indicative of future results.  You cannot invest directly in an index.

If you’re bullish on a short-term pop for the index, and you have an appetite for risk, CWEB ETF may be worth a look. The  Direxion Daily CSI China Internet Index Bull 2X Shares (CWEB) seeks daily investment results, before fees and expenses, of 200% of the performance of the CSI Overseas China Internet Index. However, there are considerable macro and technical factors at play in the China internet stocks space, and this is far from a sure thing.  Always know the risks before you make a bold trade.

Leveraged and inverse ETFs pursue daily leveraged investment objectives which means they are riskier than alternatives which do not use leverage. They seek daily goals and should not be expected to track the underlying index over periods longer than one day. They are not suitable for all investors and should be utilized only by investors who understand leverage risk and who actively manage their investments.

An inverse head and shoulders pattern is associated with a reversal of a downward trend in price. It is one of the more common reversal indications. As price moves back downward, it hits a low point (a trough) and then begins to recover and swing upward.

An investor should carefully consider a Fund’s investment objective, risks, charges, and expenses before investing. A Fund’s prospectus and summary prospectus contain this and other information about the Direxion Shares. To obtain a Fund’s prospectus and summary prospectus call 866-476-7523 or visit our website at www.direxion.com. A Fund’s prospectus and summary prospectus should be read carefully before investing.

CUSIP Identifiers have been provided by CUSIP Global Services, managed on behalf of the American Bankers Association by Standard and Poor’s Financial Services, LLC, and are not for use or dissemination in any manner that would serve as a substitute for a CUSIP service. The CUSIP Database, ©2011 American Bankers Association. “CUSIP” is a registered trademark of the American Bankers Association.

Shares of the Direxion Shares are bought and sold at market price (not NAV) and are not individually redeemed from a Fund. Market Price returns are based upon the midpoint of the bid/ask spread at 4:00 pm EST (when NAV is normally calculated) and do not represent the returns you would receive if you traded shares at other times. Brokerage commissions will reduce returns. Fund returns assume that dividends and capital gains distributions have been reinvested in the Fund at NAV. Some performance results reflect expense reimbursements or recoupments and fee waivers in effect during certain periods shown.

Absent these reimbursements or recoupments and fee waivers, results would have been less favorable.

Direxion Shares Risks - An investment in the ETFs involves risk, including the possible loss of principal. The ETFs are non-diversified and include risks associated with concentration that results from an ETF’s investments in a particular industry or sector which can increase volatility. The use of derivatives such as futures contracts and swaps are subject to market risks that may cause their price to fluctuate over time. The ETFs do not attempt to, and should not be expected to, provide returns which are a multiple of the return of their respective index for periods other than a single day. For other risks including leverage, correlation, daily compounding, market volatility and risks specific to an industry or sector, please read the prospectus.

Risks associated with investments in Chinese companies include, among others, (i) the small size of the market for Chinese securities and low trading volume, resulting in a lack of liquidity and in price volatility; (ii) currency devaluations and other currency exchange rate fluctuations or blockages;(iii) the nature and extent of intervention by the PRC government in the Chinese securities markets, whether such intervention will continue and the impact of such intervention or its discontinuation; (iv) the risk of nationalization or expropriation of assets; (v) the risk that the PRC government may decide not to continue to support economic reform programs; (vi) limitation on the use of brokers; (vii) higher rates of inflation;(viii) greater political, economic and social uncertainty; (ix) market volatility caused by potential regional or territorial conflicts or natural disasters and; (x) the risk of increased trade tariffs, embargoes and other trade limitations. These factors can directly affect A-shares, and may indirectly affect investments that derive their value from Ashares. Any reduction or elimination of access to A-shares will have a material adverse effect on the ability of the fund to achieve its investments objective.

Risks of the Fund include Effects of Compounding and Market Volatility Risk, Derivatives Risk, Leverage Risk, Market Risk, Market Disruption Risk, Aggressive Investment Techniques Risk, Counterparty Risk, Intra-Day Investment Risk, Daily Index Correlation/Tracking Risk, Other Investment Companies (including ETFs) Risk, and Emerging Markets Risk. Investing in, and/or having exposure to, emerging markets instruments involves greater risks than investing in issuers located or operating in more developed markets. Please see the summary and full prospectuses for a more complete description of these and other risks of the Fund.

Distributor for Direxion Shares: Foreside Fund Services, LLC.

  • China Internet ETF (CWEB)
  • Leveraged & Inverse ETFs
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