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With Alibaba Stock, the Risks Simply Outweigh the Rewards

Josh Enomoto

Alibaba Group (NYSE:BABA) is either a case of the glass being half empty or half full. Although worries obviously abound for Chinese equities, the technicals of Alibaba stock can be viewed as solid.

Despite recent positive moves, Alibaba stock faces a mountain of challenges

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On Thursday, the U.S. markets all surged . The three major investment indices were all in the black. Further, several companies in industries ranging from technology to oil rose meaningfully.

But American stocks weren’t the only ones benefiting from the bullishness. Perhaps surprisingly, BABA stock climbed strongly, gaining nearly 3% on the day.

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Based on that move, Alibaba stock may seem like a solid buy. Plus, Alibaba’s Group’s peers, such as JD.com (NASDAQ:JD) and Tencent (OTCMKTS:TCEHY), have also enjoyed strong momentum.

But although BABA stock is up big since hitting a bottom in early August, its Friday closing price of $17.69 should raise eyebrows.

For one thing, $180 represented resistance three times between the beginning of July and the end of August. That BABA stock couldn’t get past this level again is quite telling.

Additionally, the U.S.-China trade war is still worrisome. While the markets are enjoying their rally, a Twitter (NYSE: TWTR) post from President Trump could derail everything. Thus, I’m not too wild about jumping aboard BABA stock.

Is Another Turning  Point Coming for Alibaba Stock?

I’d like to make another point about the technical position of Alibaba stock. From the latter half of 2017 through July of the following year, the $180 level represented strong support. Since August of 2018, though, $180 has been strong resistance for BABA stock.Technically, then, BABA stock has reached a turning point.

Two years ago, market analysts talked expectantly about the growth opportunities of Alibaba Group. BABA, after all,  was a dominant e-commerce and technology player standing atop the world’s biggest consumer market.

Now the outlook has changed dramatically. Pessimists decry what could be an unnecessarily prolonged trade war that ends up severely hurting the top two global economies. Furthermore, if the U.S.  suffers a recession, the ripple effect would again negatively impact both sides.

But if the president’s tweets push the markets higher,  Alibaba stock could regain $180 and then climb meaningfully higher.

But how likely is this scenario? In my view, it’s  not likely at all. Here’s why:

The Trade War Will  Hurt BABA Stock in the Nearer Term

To understand the trade war requires having some knowledge of the battling sides. On the American side, the Trump administration has a vested interest in protecting intellectual property. From China’s perspective, it’s primarily interested in fully transitioning from a developing nation to a developed one.

Meanwhile, over the last five years, Chinese President Xi Jinping has obtained comprehensive power. According to Fox News, Xi “is simultaneously general secretary of the Communist Party, president of China and chairman of the Central Military Commission.”

That was fine and well during peace time. But in the present context, Xi has a full plate. Not only is he warring with the Trump administration, but he must also control spiraling protests in Hong Kong. In all likelihood, he lacks experience with handling multiple, high-level crises.

Thus, I think it’s reasonable to assume that the Trump administration smells blood. And although the U.S. is hurting, we’re probably damaging the Chinese economy more. For example, Chinese consumer confidence has steadily declined since February of this year. By contrast, U.S. consumer confidence has generally grown since earlier this year.  I don’t think the state of China’s economy will help Alibaba stock.

But that doesn’t mean China will concede the trade war. In order to maintain power, Xi must regain credibility. That won’t happen if he caves into America’s demands. Given this situation, the economic conflict will likely extend into next year. Obviously, that’s not positive for BABA stock.

How to Approach Alibaba Group

Although Alibaba stock has enjoyed a resurgence recently,  I don’t think the rebound has inspired much confidence in BABA. As I noted, the trade war is a problem, and neither side is likely to give much ground. Until a resolution is found, both the American and Chinese economies will suffer. However, Chinese consumer sentiment has taken a hit, which bodes poorly for Alibaba Group.

Additionally, a number of factors suggest that the U.S. may suffer a recession. If a recession does occur, BABA stock would probably drop. Although the Chinese economy is robust, it’s also dependent on exports. Thus, if the U.S. economy weakens, it might take China down with it.

Ultimately, I think the risks facing BABA stock outweigh its potential rewards. While the recent moves by Alibaba stock may have encouraged the bulls, the rebound hasn’t removed longer-standing concerns.

As of this writing, Josh Enomoto did not hold a position in any of the aforementioned securities.

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