China slides into correction too: Are Chinese stocks better buy on the dip candidates?

While our eyes have been glued to the volatility in U.S. markets, Chinese stocks have staged their own correction.

The Shanghai Composite is down 12.1% from its high on January 24 to the low on Thursday, February 8.

With the Lunar New Year and the week-long Spring Festival Holiday almost upon us, it’s not surprising that this is a volatile week. The People’s Bank has to juggle a spike in demand for currency and liquidity before the onset of the holiday and it’s all too easy for the bank to inject too much or too little money into some part of the financial system. (And then it has to figure out how much liquidity to remove from the market when the holiday is over.) The opportunity for error is especially strong this year because China is pursuing efforts to reign in lending and speculation in a number of parts of its finical system. For example, regulators are scheduled to put out new rules to restrain lending in the shadow banking “sector” in March.

It’s also extremely likely that the turmoil in U.S. markets, coming right before the beginning of the Lunar New Year in festival on February 16 has led traders and investors and financial companies to pull money from the markets. Nobody wants to be exposed to global market risk when China’s markets themselves are closed.

All of which suggests that anyone interested in buying on the dip in this current period of volatility should include Chinese candidates on the list. I’d take an especially long look at the shares of two of China’s Internet giants, both of which trade in New York, that are in my 50 Stocks long-term portfolio and in my Jubak Picks 12-18 month portfolio.

Alibaba Group Holding (BABA) closed on Friday February 9 at $176.67, up 1.71% on the day, but is down 15.3% from the January 26 high at $205.22 to the February 8 low at $173.70. The shares are still decently above the 200-day moving average at $163.38.

The other interesting candidate is Tencent Holdings (TCEHY), which closed at $52.20 on February 9, up 1.75% on the day. The shares are down 15.8% from the January 26 high at $60.96 to the February 8 low at $51.30. The stock is still comfortably above the 200-day moving average at $40.01 and only broke below the 50-day moving average at $54.09 on February 7.

I think you’ve got a few days to watch volatility and trends before making a move on these shares. My thought now is that I’d like to add to positions–or establish a position–before the end of the Lunar New Year holiday on February 21. I think the end of the holiday will bring cash from Chinese investors back into the market. The People’s Bank is also likely to act to supply support to the markets once the holiday is over. Beijing does have a history of supporting stocks to end a market drop.