Alibaba shares still China stock market 8217 s lightning rod

Updated 2030 BST

Shares of Alibaba Group Holding are once again a lightning conductor for resurgent Chinese stock market turmoil on Monday.

The US-listed stock of China’s biggest e-commerce company has been struggling for months.

It hit its lowest-ever levels in the first week of July, in synch with lows for the year notched by Chinese stocks.

BABA—to use its US market ticker as shorthand for its name—bottomed at $76.21 on 7th July before bouncing, but remains about 30% lower than the all-time high of $119.30, reached on 13th November.

The gargantuan holding entity comprises of firms offering consumer-to-consumer, B2B, search, price comparison, online payment, film, and music streaming and sundry services beyond these.

Naturally, as it attempts to establish online (and some offline) dominance in these fields in China and beyond, it is in a phase of heavy investing.

Consensus forecasts of its capital expenditure this year suggest at least $1.1bn.

That compares with free cash flow that stood at $233m at the end of its last financial year.

The company has also faced a number of regulatory and legal issues since its $22bn IPO last autumn.

Most recently, in May, the online retailer was sued by a group of luxury goods makers over sales of counterfeit goods.

Gucci, Yves Saint Laurent and other brands accuse Alibaba of knowingly making it possible for counterfeiters to sell their products.

Alibaba said the complaint had no basis and that it would “fight it vigorously.”

An unfortunate month to bounce from all-time low

Still, given that BABA is probably the most liquid Western-listed Chinese stock, it has also reacted sharply to the spectacular stock market collapse seen in mainland China recently.

The latest leg of this rout on Monday saw 8.5% wiped off the Shanghai Composite Index, largely deleting progress the market made following a rebound in the middle of the month.

The CSI300 index—constituted of the largest listed companies in Shanghai and Shenzhen—closed 7% lower, having seen a loss of 8.6% earlier.

Both major indexes in the region posted their largest one-day drop since 2007, shattering a deceptive period of calm that followed a barrage of support measures Beijing unleashed in mid-June.

The markets fell in apparent reaction to soft economic data about Chinese industrial companies on Monday and a disappointing private factory sector survey on Friday.

However analysts noted that the scale of the sell-off did not seem directly linked to these macroeconomic triggers.

Traders speculated that monetary authorities might have been preparing to reduce backstops they’d placed on the Chinese stock market and the wider credit economy, and this had triggered the return of something approaching panic to the market.

It’s worth noting however, that close-to-close volatility was more elevated in the broader Shenzhen-listed index than the more closely eyed Shanghai Composite.

On the CSI300′s daily chart, the 10-day average close-to-close realised volatility has risen to 56.63, against global financial crisis highs of 77 in 2008.

That compares with the Shanghai Comp’s 10-day average close-to-close vol. which traded on Monday near 177, having been at 314 during the late 1990s Asian financial currency crises.

Open sesame

Either way, the read-across has sent Alibaba shares as much as 4% lower on the day on New York Stock Exchange trading.

It has to be said volume does not look set to surpass moving averages materially, if at all, having reached fewer than 7 million shares traded so far, compared the 11.5 billion 30-day average.

The relatively thin participation could bring another volatile shift, of the same kind that opened a price gap between Friday’s close and this morning’s open.

However the stock continues to look challenged, broadly speaking.

Its fall of the last week lost the support of an important fibonacci projection mark—38.2%—based on the bounce from all-time lows earlier this month.

Additionally the speed and gradient of the ascent now presents some ‘barriers to re-entry’ for the shares, should they approach the walls of their previous trend lines without sufficient momentum.

Judging by the Slow Stochastic indicator alone, the chances are that BABA’s current downturn still has some room to run, at least for the rest of the week.

This may at least partly symbolise less than sparkling prospects for the broader Chinese stock market of which Alibaba is a de facto bellwether in the West.

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East to West sell-off

Shares of other US-listed China-based firms were in even worse shape in than Alibaba’s by mid-way through the session across the Atlantic.

Alibaba’s largest e-commerce rival, JD.com, was the hardest hit, losing 7.3%; its deeper concentration in online retailing means it might be more exposed to any consumer discretionary tightening than Alibaba itself.

The stock of online sports lottery service provider 500.com, was down about 5%, whilst web services firm Baidu, which is due to report quarterly earnings on Monday evening, lost 4.5%.

Indirect assets based on China’s stock market performance also reacted strongly.

Both of Direxion Investments’ main China-focused ETFs surged 13 percentage points.

Direxion Daily FTSE China Bear 3x was 13% higher, whilst Direxion Daily FTSE China Bull 3x was 13% lower.

They had extended their moves despite the China Securities Regulatory Commission denying during Europe’s evening that its main vehicle for direct market action, the China Securities Finance Company, might be winding down measures to buttress equities.

The CSRC also said it would deal “severely” with anyone found guilty of so-called “malicious shorting of stocks”.

BABA barely bounces

Whilst the loss by Alibaba Group Holdings shares was relatively contained compared to that shown by some of the smaller foreign-listed Chinese tech names, City Index clients continued to reflect the same caution on their biggest peer.

Trading in City Index’s Alibaba Daily Funded Trade has respected the 61.8% level projected off its all-time low on 8th July for the entire US session so far, including after the underlying stock bounced from the day’s lows.

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This further reduces the likelihood that the gap between last week’s closing price and Monday’s open will be closed any time soon.