Chinese tech stocks have surged once again

Key points:

• After being deemed uninvestable a couple of months ago, Chinese 'net stocks have surged
• Nearly all of them are above their 50-day averages, and more than half are above their 200-day averages
• Similar behavior tended to precede gains over the next 1-2 years

Nearly all Chinese technology stocks are back in uptrends

On October 25, we looked at the latest plunge in Chinese internet stocks. While there was a danger of "fool me once" activity, the pure panic at the time was a clear sign of excess.

They have recovered nicely since then. It has been enough to push nearly all the stocks above their medium-term 50-day moving averages, exceeding the rally from June.

Whenever there was an extreme cycle from a few members above their 50-day average to nearly all of them, the index that underlies the popular KWEB fund tended to rally. There were some big losses in there, so it's not like it was perfect.

Long-term trends have staged a more impressive recovery

Even more impressively, more than half the stocks are now above their long-term 200-day moving averages. That's a massive improvement from June, when barely a third of them closed above their averages.

Taking a longer-term look at forward returns after similar behavior, Chinese 'net stocks showed large gains in the two years following each signal. Granted, history is limited, and the sample size is tiny, but this kind of activity was admirably consistent in preceding significant and sustained gains.

Closer to home, the Nasdaq Golden Dragon China Index has finally managed to close above its 200-day average for the first time in nearly 400 days. That's almost twice as long as the prior most protracted downtrend.

This, too, preceded some iffy returns, especially over the next 3-6 months, though all but one showed a positive return over the next year.

What the research tells us...

The buying pressure in Chinese tech stocks is similar to what we've seen in U.S. and global stocks, only on a grander scale. In October, investors had given up (again), designating the sector as uninvestable. The herd has started to migrate to the other extreme, and buying interest has been intent and broad-based. That has been a consistent shot-then-chaser for positive returns over decades and across markets. On a longer-term time frame, it should be another bullish factor for this previously shunned group of stocks.