When a stock market correction hits, our tendency is to head for the sidelines. Indeed, since Feb. 21 our exposure has averaged out at 90% cash. But if you are going to venture in, as we've done briefly with China stocks, it's best to focus on exchange traded funds and relative strength winners.
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With the U.S. stock market behaving so well for more than a decade, international stocks haven't provided much of a temptation. China stocks in particular have had a rough go between trade wars, delisting talk and at times a government hostile to businesses.
But in this latest stock market correction, things got flipped. China stocks ratcheted up strongly and even international ETFs that excluded U.S. stocks seemed to be where money was flowing.
Since our overall exposure remained low, our venture into China stocks usually consisted of quick trades as probing buys. Sometimes that's how you can stay engaged while managing your downside risk.
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After a strong start to the year, the KraneShares CSI China ETF had its first pullback to the 21-day line (1) as the U.S. stock market correction got underway. We tried a position as China stocks looked like they were bouncing but exited the same day due to the poor close.
We had the right idea but just off on the timing. Another venture into China stocks used a different instrument just a few days later (2). The iShares MSCI China ETF, as well as KWEB saw a gap up higher with a relative strength line hitting new highs before the price. Still, the market vulnerability led us to trim our first profit quickly (3) and exit the remainder before the weekend (4). It allowed us to get a quick, small gain and avoid the pullback that followed.
A Couple More Tries In China Stocks
After the pullback in China stocks, we ventured in again. KWEB rejoined SwingTrader on another bounce near its 21-day line (5). It looked like a good upside reversal but our expectation was for a little more progress by the end of the day. So we exited with a small gain and missed out on some even larger gains. Still, no harm no foul.
Our latest venture would have benefited from some cushion if we had held the position. We entered KWEB again as its relative strength line took another decisive move higher (6). Again, our intention wasn't to knock the trade out of the park but more to test the waters.
When we failed to make progress the next day (7) we took half the position off at a small loss. That led to reduced risk ahead of the gap down the next day, and we exited the remaining position (8).
It's largely a wait-and-see approach for our next step on China stocks. If money comes rushing back to U.S. stocks, China will lose its luster. But if the stock market correction continues in U.S. markets, quick swing trades elsewhere can be a place to get some gains while we're waiting for our next rally.
More details on past trades are accessible to subscribers and trialists to SwingTrader. Free trials are available. Follow Nielsen on X, formerly known as Twitter, at @IBD_JNielsen.
