Lack of China Tech Short Covering Means Rally Is Fresh Buying

The recent rally in Chinese tech stocks has been a significant development in the global markets, with investors eagerly awaiting the next move. However, the lack of short covering in these stocks suggests that the rally may be driven by fresh buying rather than a short squeeze. This observation has important implications for investors looking to capitalize on the ongoing trend.

The rally in Chinese tech stocks began in late September 2024, following a period of significant underperformance. The stocks, which had been under pressure due to regulatory concerns and geopolitical tensions, suddenly reversed course and began to gain momentum. The rally has been particularly notable in the e-commerce sector, with Alibaba Group Holding Limited (NYSE: BABA) and JD.com, Inc. (NASDAQ: JD) leading the charge.

However, unlike previous rallies in Chinese tech stocks, the current one has not been accompanied by a significant increase in short covering. Short covering typically occurs when investors who had bet against a stock's price are forced to buy back shares to limit their losses. This phenomenon can drive up the stock's price and contribute to a rally. In the current scenario, the lack of short covering suggests that the rally is not being driven by investors closing out their short positions.

Instead, the rally appears to be the result of fresh buying by investors who are bullish on the prospects of Chinese tech companies. This is evident in the strong analyst recommendations for both Alibaba and JD.com, with a majority of analysts rating the stocks as 'buy' or 'strong buy'. The positive sentiment is also reflected in the companies' share repurchase programs, with Alibaba announcing a $4.1 billion repurchase program and JD.com unveiling a $5.0 billion program.

The lack of short covering also implies that there is still room for the rally to continue, as there are fewer shares available to be bought back by short sellers. This suggests that the rally may have further to run, provided that the fundamentals of the companies remain strong and investor sentiment remains positive.

In conclusion, the lack of short covering in Chinese tech stocks indicates that the current rally is being driven by fresh buying rather than a short squeeze. This is a positive sign for investors, as it suggests that the rally is supported by strong fundamentals and positive investor sentiment. As long as these factors remain in place, the rally in Chinese tech stocks is likely to continue, presenting opportunities for investors to capitalize on the trend.