We Will Soon Be Saying Rah! Rah! for Sagging Alibaba

 | Dec 26, 2017 | 2:00 PM EST
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We're at the tail end of what has been a solid year for the indices. Stocks continue to trade at or near their all-time highs despite rising interest rates. Now, we're in what historically has been an extremely bullish phase -- late December, the time of the so-called Santa Claus rally.

Simply put, there is a strong tendency for stocks to rally at year-end. Mutual funds and other institutions that are long stocks seek to push them higher in order to improve their year-end performance returns. The fact that markets tend to be thin at this time of the year due to the holidays helps to create an ideal environment in which to direct stocks higher.

Considering the above, what's the best type of stock to buy right now? Avoid beaten-down names, as those are more likely to be victimized by tax-loss selling. Instead, look for stocks that have performed well but are trading off of their highs.

One such name is Alibaba Group Holding Ltd. (BABA) . This stock has doubled in 2017, reaching its all-time closing high of $191.19 on Nov. 24 (green arrow). Since then, the stock has pulled back to the mid-$170s, dipping slightly below its 50-day moving average (blue). Alibaba is off of its highs, but its bullish trend is still intact, as shown by its rising 200-day moving average (red).

Recently, the stock formed a higher low (HL), a bullish sign. Alibaba's MACD (moving average convergence divergence) indicator just flashed a buy signal on Dec. 22 (black arrow).

Source: TradeStation

Why has this stock pulled back in recent weeks? The pullback in Alibaba is very similar to that of the MSCI China Index. In the chart below, we compare Alibaba (green) to the iShares MSCI China Index ETF (MCHI), which is depicted in red (performance figures as of July 1, 2017). Note that the shape of Alibaba's pullback closely matches the pullback in MCHI (shaded yellow).

Source: TradeStation

One could argue that Alibaba is a victim of its own success. Even after falling nearly 5% over the past month, the stock has climbed by about 100% since Jan.1t. Like many of this year's big winners, Alibaba may have slipped due to profit-taking and sector rotation.

The point is, Alibaba doesn't appear to have lost ground due to any company-specific issues. Alibaba is a strong stock in a strong market, trading well off of its highs, and that makes it an intriguing pickup at its current price.

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