The Gig is Up in Chinese Internets: BIDU, YOKU, DANG, QIHU

The market has bounced slightly off the lows after early weakness, but overall it has not been a noteworthy day for the indices. The SPDR S&P 500 ETF (SPY) held that $129.50 low from April 18th. Investors are so far just digesting the bearish action we saw last week and unwilling to put more risk on the table after recent volatility.

The big story in the market continues to be fall of the Chinese Internet stocks, a phenomenon that could be just in its early stages. First of all, it is important not to throw the baby out with the bathwater. While, Inc. (BIDU) may also sell-off with its fellow Chinese internet stocks, it’s prospects seem much brighter than some of its over-hyped colleagues. The two I am focusing on, for a couple reasons are, Inc. (YOKU) and Ecommerce China DangDang (DANG).

Both stocks IPO’ed 6 months ago this week, which means the end of the IPO lockup period is coming. With the current firestorm surrounding the Chinese internet space, it would seem logical that investors may looks to unload some shares following the end of the lockup period. DANG is approaching its IPO price of $16 (a break down through could trigger more momentum), while YOKU has much more room to lows.

These IPOs were touted as the (DANG) and Youtube (YOKU) of China, and I’m not sure I’ve anything more nonsensical in my life. Underwriters use these monikers to excited eager American investors, and initially both IPOs were a smash hit. YOKU’s success lasted much longer before the air started coming out. But even with best of the best-case earnings scenarios, YOKU would lose money for at least the next 5 years. It’s not even the vimeo of China. While you might want to wait for bounce to short YOKU over the next two days, that bounce might not come as investors head for the exits in droves. Thursday was the YOKU bulls last stand, and it seems it wasn’t enough.

Among the other weakest Chinese internets has been Qihoo 360 Technology Co Ltd (QIHU), an anti virus provider in China. The stock is down nearly 10% today after bearish comments emanating from the roadshow.

Another focus stock over the past couple weeks has been Netflix, Inc. (NFLX), and we have seen a major complexion change after the massive short squeeze. With its 20% net float short, NFLX is prone to exaggerated squeezes, and that is what we saw after the breakout to new highs. But when the squeeze ends, the drop can be harsh and that is what we are seeing today. A lot of longs are likely to have closed out their winning positions today and we could see some downside continuation. If it can hold up and get back through highs, it would likely trigger more momentum.

Apple Inc. (AAPL) is holding up well ahead of the 1pm ET conference featuring Steve Jobs as keynote speaker, and traders will be watching the stock during that event.

By: John Darsie

Disclosure: Scott Redler is long SPY, Short NFLX

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